Forming an Indiana Partnership

Partnerships are pass-through entities. When it comes to paying taxes, the owners (members) pay the partnership's taxes on their personal tax returns. Every year a partnership files a Form 1065 tax return but owes no tax itself. Each partner receives a Schedule K-1 that shows the partner's annual profits or losses share. The Schedule K-1 is filed with the partner's individual tax return.

A biennial report must be filed with the Indiana Secretary of State (SOS). The Internal Revenue Service (IRS) provides information regarding the federal tax requirements for partnerships on their website. When forming a business structure, the most important aspect to consider is the personal liability protection it may provide.

Personal liability refers to the degree of responsibility that a partner may incur from the obligations and debts of the business. Some business structures will offer personal liability protection for the owner, granting them shelter for their personal assets. For example, if the business loses a lawsuit and is forced to pay a settlement, personal liability will protect the owner's personal assets. Limited liability protection will usually not apply in the following situations:

  • Owing taxes.
  • Committing fraud.
  • An act that violates liability protection or the law.

What Every Business Owner Needs to Know About Starting a Company

There are several types of business structures. Legally, the structure that's chosen will determine how the business is taxed. Additionally, it will indicate whether the owner has unlimited liability. There are three types of partnerships: general partnership, limited partnership, and limited liability partnership.

General Partnership

A general partnership is formed and governed based on the Indiana Uniform Partnership Act. A general partnership consists of two or more individuals who are co-owners of a company. To protect all owners, it's highly recommended by many to create a general partnership agreement. It's possible to create a partnership without creating a formal agreement, but it will substantially increase the risk for future disputes between owners. In cases where a partnership agreement hasn't been created, the Uniform Partnership Act will govern how disagreements are handled.

If a partnership agreement doesn't indicate otherwise, the default criteria established by the Uniform Partnership Act will conclude that all revenue, expenses, and decision-making capabilities are shared equally among the partners. The revenue and expenses from the general partnership are passed-through to the owners on a pro rata basis. Also, the partners must pay self-employment tax and all are jointly liable to all creditors.

In fact, a partner is personally liable for all wrongful acts or omissions of a co-partner that are executed in the daily operations of the partnership. Therefore, selecting a general partnership as the desired business structure may be extremely risky for a financially conservative owner. The state of Indiana doesn't require a general partnership to register with the state, therefore, a fee is not charged.

Limited Partnership

A limited partnership is formed and governed based on the Indiana Uniform Partnership Act. A limited partnership is similar to a general partnership, except that while a general partnership must have at least two general partners, a limited partnership must have at least one general partner and at least one limited partner. The general partner(s) are responsible for managing the company and have the same responsibilities and rights as the partners in a general partnership, which includes joint and several liability.

The limited partner contributes capital toward the equity of the company but is not involved in the daily operations of the business. This person can be thought of as playing the role of a silent partner. A limited partner enjoys personal limited liability. In other words, a limited partner may only lose the capital that they've put into the business.

Limited Liability Partnership

A Limited Liability Partnership (LLP) is formed and governed based on the Indiana Uniform Partnership Act. An LLP is considered a blend of a corporation and a partnership. Beyond the assets that were invested in the partnership, none of the partners may be held personally responsible for the actions of other parties. Each partner may decide on how much they'd like to be involved in the daily operations of the business and also how much capital they'd like to contribute.

LLPs are usually formed by registering with the state and through a written agreement between the partners. LLPs may be reserved in some states for professional partnerships, such as for accountants and lawyers.

If you need help with the Indiana Limited Partnership Act, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.