Do you want to form a limited partnership (LP) in North Dakota, but you’re not familiar with the formation process? Read on for more information.
A limited partnership can be a great alternative to a general partnership. Still, the LP is more difficult to form than the general partnership’s casual nature. We’ll discuss all the crucial details of forming this business type in North Dakota in this article.
An LP or Limited Partnership is a way of structuring a business that provides limited liability to its members (partners) and the structural and tax flexibility of a partnership. The limited liability aspect of the LP protects the assets of its limited partners from the debts, losses, and legal claims related to the limited partnership but not the assets of general partners. Also, like partnerships, LPs are free of many of the organizational requirements of corporate and corporation taxes.
What Is a North Dakota Limited Partnership?
There are several key differences between the general and limited partnerships (LP), starting with the partners’ roles. With a general partnership, the partners split profits evenly and take equal responsibility for liability ― general partners are personally liable for the company’s debts and settlements.
There is at least one general partner and one limited partner with a limited partnership. A limited partner does not have managerial responsibilities. 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 company’s day-to-day operations.
Another significant 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 North Dakota or pay any formation fee. The general partnership is formed when the partners begin transacting business together.
On the other hand, a limited partnership does have a formal formation process with the North Dakota state government, and there is also a formation fee involved.
What are the Requirements for an LP?
An LP can only be formed under state law. As a result, the requirements and protections for LPs can vary widely from state to state. While there is a lot of flexibility in creating and structuring LPs in North Dakota, there are a few mandatory requirements:
- Choose a Name for the LP. This name must be different from all other business names on record at the North Dakota State Corporation Secretary of State. It must include either “limited partnership,” “Ltd. Partnership,” or the abbreviation “L.P.” or “LP.”
- Choose a Registered Agent. North Dakota requires that every business entity have a registered agent to ensure that any critical information or legal issues will make it to the LP. A registered agent can be an individual resident of North Dakota or a business registered with the Secretary of State.
- Signature of General Partner. All LPs must have at least one general partner that is personally liable for the actions of the LP.
- Certificate of Limited Partnership. The Secretary of State does not provide a standard Certificate of Limited Partnership. This document requires the name of the LP, the principal office of the LP, the general character of the LP’s business, the name of the registered agent, the principal office address of the LP, general information on all general partners, and the business address of the registered agent.
- Partnership Agreement Optional. North Dakota does not require a partnership agreement, but such an agreement is a good idea to resolve partner contributions, distribution of profits, partners’ authority, etc.
- Annual Report. North Dakota requires LPs to submit an annual report which can be filed with the Secretary of State. Information on what to include in an annual report can be found online.
What Paperwork Do I Need to Form an LP?
The forms required to form your business as an LP can be found on the Secretary of State website. The Certificate of Limited Partnership and a processing fee can be filed with the Secretary of State.
How Do I Handle Taxation Requirements?
Limited partnerships require a federal tax ID number or EIN. An EIN is the business version of a social security number. An EIN is used for a variety of essential LP functions.
Many banks require you to open business bank accounts. You’ll also need an EIN for tax purposes, hence the federal tax ID number. Get an EIN for your LP for free through the IRS.
State Requirements
In North Dakota, most of your state-level taxes will depend mainly on what services or goods your business offers.
Limited partnerships that buy or sell goods will likely be required to pay sales and use tax. More information on sales and use tax and directions on how to register for them can be found on North Dakota’s tax web page.
Depending on the nature of your business, you may also need to pay alcohol tax, motor fuel tax, and income tax withholding. Most of these taxes can be found on North Dakota’s business tax e-file page.
Local Requirements
Depending on where in North Dakota your business is located, you may need to pay local taxes.
Some jurisdictions have location-specific sales and use taxes or industry-specific taxes that vary depending on the location of the business. To discover which local taxes you may be liable for, consult North Dakota’s guide to local taxation and the North Dakota Tax commissioner.
How Do I Obtain Business Licenses and Permits?
Not all limited partnerships in North Dakota will require it, but some will have licensing needs depending on the business type.
Most state-level permits are industry-specific. Most permits are issued either by the Secretary of State or the Attorney General.
For additional help defining your business license requirements, consult the Licensing Information section of the North Dakota website. Additional resources can be found on North Dakota’s New Business Website.
In addition to any state-level licensing, you’ll also want to check with your municipality website and make sure you abide by all local license and permit requirements.
What Benefits Does North Dakota Give to an LP?
There are several reasons why you might want to structure your business as an LP:
- Limited Liability: Like a corporation, LPs shield the personal assets of their limited partners from the debts and legal liability of the company. However, a limited partnership must have at least one general partner that is personally liable for all claims made against the LP.
- Pass-Through Tax Entity: LPs are taxed as a pass-through entity and avoid the double tax associated with corporations. The LP itself is not taxed. Instead, partners are taxed according to their tax bracket when they receive a share of the LPs profits.
- Survivability: Unlike a general partnership, LPs do not have to be reformed every time a partner dies.
- Late Filing: An existing general partnership can convert to a limited partnership at any time if it fulfills the requirements listed above.
What Disadvantages Does North Dakota Give to an LP?
While the limited liability and ability to avoid the double tax associated with the corporation can be appealing, there are a few disadvantages to structuring your business as an LP:
- Filing and Fees: Unlike a general partnership or sole proprietorship, LPs require filing formation forms and payment of some administrative fees, which can cost upwards of $100 for initial filing, $25 in annual fees, and may require hiring a lawyer.
- General Partner Liability: Unlike a limited liability company or a limited liability partnership, a limited partnership requires at least one general partner that is personally liable for the claims made against the LP.
Should I Hire a Lawyer?
If you are looking for an attorney to help you structure your business, contact a local North Dakota corporate lawyer today to get the help you need.
