General Partnership in Indiana: Formation, Taxes & Legal Basics

Key Takeaways

• General partnerships in Indiana are easy to form but offer no liability protection.
• No registration is required with the state to form a general partnership in Indiana.
• Partners in a general partnership are jointly liable for debts and obligations.
• A partnership agreement is not required but is strongly recommended.
• General partnerships may dissolve voluntarily or due to partner withdrawal or death.
• Limited partnerships and LLPs offer differing liability protections and operational structures.
• Dissolution of a general partnership in Indiana must follow specific legal procedures.

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.

Dissolution of a General Partnership in Indiana

General partnerships in Indiana can be dissolved voluntarily or due to certain events such as death, withdrawal, or bankruptcy of a partner. Unless otherwise specified in a partnership agreement, dissolution typically follows these steps:

1. Agreement to Dissolve: All partners must agree or a triggering event must occur.
2. Notice to Creditors: Inform all creditors and settle outstanding debts.
3. Asset Distribution: After liabilities are paid, remaining assets are distributed among the partners according to ownership percentages.
4. Final Tax Filings: Submit a final IRS Form 1065 and issue Schedule K-1 forms to partners.
5. Close EIN and Bank Accounts: Notify the IRS and close the partnership's business bank account.

Creating a written dissolution agreement helps clarify partner responsibilities and prevents future disputes.

Pros and Cons of a General Partnership in Indiana

Advantages:

• Ease of Formation: No formal registration or fees required to start.
• Flexibility: Partners have direct control over business decisions.
• Tax Simplicity: Pass-through taxation means profits and losses are reported on individual tax returns.

Disadvantages:

• Unlimited Liability: Each partner is personally liable for business debts and legal obligations.
• Shared Responsibility: Each partner can bind the partnership legally and financially.
• Lack of Continuity: The partnership may dissolve if a partner withdraws or passes away.

Formation Requirements for a General Partnership in Indiana

To form a general partnership in Indiana, no formal filing with the Secretary of State is required. Simply entering into a business relationship with another person with the intent to share profits is enough to create a partnership under Indiana law. However, it is advisable to choose a business name and check its availability through Indiana’s INBiz portal. If operating under a name other than the partners’ legal names, the partnership must file a Certificate of Assumed Business Name with the county recorder’s office.

Key steps to consider:

• Choose a business name and check availability.
• File for a DBA (Doing Business As), if necessary.
• Apply for an EIN (Employer Identification Number) from the IRS.
• Open a business bank account in the partnership’s name.
• Draft a written partnership agreement, even though it is not legally required.

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.

How a Limited Partnership Differs from a General Partnership in Indiana

While both structures involve multiple owners, the key difference lies in liability and involvement:

• General Partners: In both structures, general partners manage the business and bear unlimited liability.
• Limited Partners: Only applicable in a limited partnership, these individuals are passive investors and are shielded from liability beyond their investment.

Limited partnerships must register with the Indiana Secretary of State and file a Certificate of Limited Partnership. They also must comply with annual reporting requirements and maintain a registered agent in the state.

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.

General Partnership vs. LLP in Indiana

An LLP (Limited Liability Partnership) differs from a general partnership in several important ways:

LLPs are especially beneficial for professionals who want to collaborate while maintaining personal liability protection against the actions of their partners.

Frequently Asked Questions

1. Do general partnerships need to register in Indiana?
   No, Indiana does not require registration for general partnerships unless a fictitious name is used.
2. Is a written partnership agreement required?
   No, but it is highly recommended to avoid future disputes and to define roles, responsibilities, and profit distribution.
3. Can a general partnership be converted to another business structure?
   Yes, a general partnership can convert into an LLC or corporation by filing the appropriate paperwork with the Indiana Secretary of State.
4. How is a general partnership taxed in Indiana?
   General partnerships are pass-through entities. Income is reported on the partners' individual tax returns, and each partner receives a Schedule K-1.
5. What happens if a partner wants to leave the partnership?
   Unless the partnership agreement states otherwise, the partnership must dissolve or be restructured when a partner leaves.

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