Do you want to form a limited partnership (LP) in Vermont, but you’re not familiar with the formation process?
A limited partnership can be a great alternative to a general partnership, but the LP is definitely more difficult to form compared to the more casual nature of the general partnership. In this guide, we’ll discuss all the crucial details of forming this business type in Vermont.
There are several significant differences between the general partnership and the limited partnership (LP), starting with the roles of the partners themselves. With a general partnership, the partners split profits evenly and take equal responsibility when it comes to liability ― general partners are personally liable for the company’s debts and settlements.
With a limited partnership (not to be confused with the LLC), there is at least one general partner and one limited partner, which is the term for a partner that does not have managerial responsibilities, and their liability is limited to the amount of money they invested in the partnership.
Sometimes, you’ll hear limited partners referred to as “silent partners” due to their lack of direct involvement in the day-to-day operations of the company.
Another major difference is that the general partnership is not a formal business structure, which means you don’t even need to file formation documents with the state of Vermont, or pay any sort of formation fee. The general partnership is simply formed when the partners begin transacting business together.
On the other hand, a limited partnership does have a formal formation process with the Vermont state government, and there is also a formation fee involved.
Whereas the state of Vermont allows general partnerships to operate under the individual names of the partners, that is not the case for limited partnerships, which must have a distinct business name.
Your limited partnership’s name is often the first impression you get to make on potential customers, and therefore it goes without saying that this is an important step. There are a few different aspects to take into consideration when selecting a name for your business:
In Vermont, your limited partnership is required to end with the phrase “Limited Partnership” or the abbreviation “LP.” The name may not contain the word cooperative nor the abbreviation “coop.” In addition, you cannot include any words that refer to other business types (like “corporation” or “incorporated”), and you also can’t use words that are typically used to refer to specific kinds of businesses (like “bank” or “law office”).
Another aspect to consider is including language that explains what your business does ― for example, if you’re a realtor, put the phrase “real estate” in your LP name. Additionally, if your business has strong values like being environmentally friendly, you can indicate that by including the word “green.”
At the end of the day, this is your business, and you should choose a name that makes you proud. You should also make sure your limited partnership’s name both sounds good when spoken out loud, and looks good when written down.
The most important consideration for naming an LP is to not get too attached to any one business name until you have either reserved the name with the state of Vermont, or you’ve officially formed your business.
First of all, you need to make sure your intended business name follows all of the state’s name availability guidelines. Using Vermont’s business database, you’ll need to search the name to ensure it is not already in use by another LLC or corporation. After you have confirmed the name is available, you may claim it when you register your limited partnership online with the Vermont Secretary of State.
Every limited partnership in Vermont is required to designate a registered agent, which is the individual or registered agent service that receives government correspondence on behalf of your business, then forwards those documents to you.
According to the Vermont Secretary of State,
A registered agent is the legal point of contact for a business entity, or the owner(s) of a trade name, for the receipt of service of process and notices from the Secretary of State.The only qualification to be a registered agent is that the agent has a street and mailing address located in Vermont. A registered agent may be either an individual person or business entity (i.e. not a trade name) that is registered and active with this office.“
Without a registered agent in Vermont, you could lose your good standing and the state also has the right to dissolve your LP if they decide to. In a worst-case scenario, the state could fail to alert you regarding a lawsuit against your company, which could even lead to a judgment against your business because you didn’t defend yourself.
At the end of the day, we recommend designating a registered agent service to handle these requirements. Doing so will help eliminate junk mail and more importantly, keep your personal and/or business address off public record.
At this point, it’s time to legally form your new limited partnership.
Establishing a limited partnership in Vermont requires filing a document called the Certificate of Limited Partnership. To complete it, you’ll need the following information:
The Certificate of Limited Partnership can either be completed online when you register your limited partnership with the Vermont Secretary of State or you can fill it out as a PDF file here and submit it via mail.
Cost to Form an LP: The state of Vermont charges a filing fee of $50 to form a limited partnership.
Processing Time: It typically takes 3-5 business days for the Vermont Secretary of State to process a Certificate of Limited Partnership. When the document has been processed, you may check the Secretary of State website for confirmation.
While not legally required by the state of Vermont, a limited partnership agreement outlines some of the key operating principles of the business. Even though you don’t have to submit it to the state to form your LP, it’s still a vital document that describes the exact nature of the agreement between the general partners and limited partners.
The information included in a limited partnership agreement does vary depending on the nature of your business, the size of your company, and some other variables. In general, it’s good to get the following information down in writing:
Limited partnerships require a federal tax ID number, or EIN. An EIN is basically the business version of a social security number, and it’s used for a variety of important LP functions.
For instance, you’ll need an EIN if you want to hire any employees, and many banks require them to open business bank accounts as well. You’ll also need one for tax purposes, hence the name federal tax ID number. Get an EIN for your LP for free through the IRS.
Although income from limited partnerships are distributed to individual partners who are taxed on the amount individually, your business will still be required to pay Vermont’s state business entity tax.
Your LP will have distinct tax liability depending on your business activities and legal structure. A few common taxes that may be applicable include sales tax, use tax, meals and room tax, and employer withholding tax. Thankfully, you may register for these taxes and other miscellaneous business taxes when you register your business with Vermont’s Online Business Service Center.
Depending on where in Vermont your business is located, you may also need to pay local taxes.
For example, it should be noted that some municipalities have a local option tax, which adds an extra 1 percent to the state sales tax in Burlington, Colchester, Williston in Chittenden County. To discover your limited partnership’s local tax requirements, consult the your county or city government website.
In Vermont, there is no catch-all business license that will qualify your limited partnership to operate in the state. Instead, you are liable to obtain certain specific licenses and permits which are generally determined by the nature of your business and what goods/services it provides.
New businesses in the state will potentially be required to meet the licensing needs of several different agencies. For help determining which requirements apply to your business, you’ll need to register online with the state’s Online Business Service Center. More information on Vermont licensing in general can be found by visiting the Licensing and Permits page of the Vermont state website.
If you would rather have a professional take care of your formation paperwork for you, you have a couple of options. The less expensive choice is to hire a business formation service to create your limited partnership.
While some service providers stick to less complicated business entities like limited liability companies, some also provide LP formations ― namely, LegalZoom and BizFilings. Currently ZenBusiness does not have this offering but does have regular LLC formation and business incorporation.
If you want the maximum possible degree of expertise, you should also consider hiring a business attorney to form your limited partnership. This is certainly a more expensive route, but if you want the peace of mind that every step is completed correctly ― and that all of your options have been thoroughly explored ― hiring a lawyer is a great option.
We highly recommend that you establish a business bank account so that your business and personal finances are maintained separately. This is important because it helps protect your personal assets, and also makes filing taxes much easier. Once you receive your EIN from the IRS, you’ll be able to use it to establish an account at the bank or credit union of your choice.
If your Vermont limited partnership has any number of employees, you’ll be required to carry a couple different types of insurance such as workers’ unemployment insurance and workers’ compensation insurance. Information on both insurance forms can be found either through the Workers’ Compensation Section or the Unemployment Insurance Section of the Vermont Department of Labor. After you obtain these legally required policies, it’s probably also a good idea to pursue general liability insurance, as well as some industry-specific policies.
Limited partnerships do not file business tax returns. Instead, the income is passed through the business entity to the partners, who then claim their share of profits or losses on their personal tax returns. Still, LPs do need to file an annual information return with the IRS, in which you report your business income, deductions, gains, and losses for the year.
Unlike many other states, Vermont does not require limited partnerships or general partnerships to file an annual report with the Secretary of State.
We don’t recommend that you attempt to manage your business finances without the help of a professional. There is too much room for error, and a professional can ultimately save you time and money by guiding you on how to manage your business finances. At a minimum, enlist professional help to set you up with software and the steps for keeping up with your finances on a regular basis. Then, consult back with your accountant at least a couple of times per year – and especially at tax time – to ensure you’re keeping track of everything correctly.
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