Do you want to form a limited partnership (LP) in Arizona, 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 Arizona.
What Is an Arizona Limited Partnership?
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 Arizona, 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 Arizona state government, and there is also a formation fee involved.
How to Form an Arizona Limited Partnership (in 6 Steps)
Step One) Choose an LP Name
Whereas the state of Arizona 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:
All limited partnerships in the State of Arizona must end their official business name with the phrase “Limited Partnership” or the abbreviation “L.P.” 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.”
Do You Like It?
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 Arizona, or you’ve officially formed your business.
Alabama’s name registration process is rather straightforward. To begin, you can use the Secretary of State’s website to run a business name availability search, which will allow you to determine whether your desired business name is available. Then, if you are ready to form your LP, you can file under your desired name, but if you’re not ready to file, then you can reserve your desired name for a year through the Secretary of State’s office.
Step Two) Designate a Registered Agent
Every limited partnership in Arizona 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.
The State of Arizona often refers to registered agents as “agents for service of process” or “statutory agents,” which are functionally the same thing. According to the Arizona State Code:
Each limited partnership shall continuously maintain in this state: An office, which may but need not be a place of its business in this state, at which shall be kept the records required by section 29-305 to be maintained; and an agent for service of process on the limited partnership, which agent shall be an individual resident of this state, a domestic corporation, a domestic limited liability company, a foreign corporation or a foreign limited liability company authorized to do business in this state.”
Without a registered agent in Arizona, 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.
Step Three) File the Certificate of Limited Partnership
At this point, it’s time to legally form your new limited partnership.
To do so, you must file a Certificate of Limited Partnership with the Arizona Secretary of State. When you officially create your LP, you must include the following information:
- The name of your LP
- The principal office of your LP
- The name and address of your agent for service of process
- General partner information and signatures
To submit your form, you must mail it into the Secretary of State’s office, or you may submit it in person in Phoenix or Tucson. You can find a printable PDF version here.
Cost to Form an LP: The state of Arizona charges a filing fee of $10 (with an additional $3 for each extra page) to form a limited partnership.
Processing Time: The Arizona Secretary of State’s office takes 2-3 weeks to process Certificates of Limited Partnership. However, you can pay $25 for expedited processing in 3-5 business days.
Step Four) Create a Limited Partnership Agreement
While not legally required by the state of Arizona, 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:
- The term (in years) of your partnership
- Identities and roles of general and limited partners
- Initial capitalization and ongoing capital contributions
- Allocation of profits/losses
- Management structure
- Voting rights and meeting plans
- Accounting and record-keeping practices
- Conditions for transfer and dissolution
Step Five) Handle Taxation Requirements
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.
Arizona does not levy a corporate income tax on LPs. Instead, all income flows through to the partners, who must include that income on their personal tax returns.
However, most Arizona LPs will need to pay other types of tax depending on the nature of their business. Businesses that sell or rent goods, for example, must pay Transaction Privilege Tax, which is the equivalent of sales tax. Additionally, Arizona LPs with employees must pay employer withholding tax, and you may also need to pay other industry-specific taxes.
As an LP in Arizona, determining your exact tax requirements isn’t always easy, but luckily, the Arizona Department of Revenue has a site called AZTaxes to help business owners determine which taxes they need to pay and automatically register your business to pay those taxes.
Depending on where in Arizona your business is located, you may also need to pay local taxes.
Major cities in Arizona – like Phoenix, Tucson, and Mesa – have their own individual tax requirements as well as local requirements for business permitting and licensing. Therefore, you should check with your local government to ensure that you understand all relevant local laws.
Step Six) Obtain Business Licenses and Permits
In the State of Arizona, most business entities, including LPs, do not need a general business license to operate legally within the state.
However, you may need certain industry-specific licenses depending on the nature of your business. The most common type of industry-specific business license is a Transaction Privilege Tax License, which is commonly referred to as a sales tax or vendor license. You may also need other regulatory licenses depending on your area of business.
To determine which licenses your LP needs to operate legally, you should consult the Arizona Commerce Authority’s Business One Stop portal, which has information on all state and local licenses and permits that your business may require.
Would You Prefer a Professional Form Your LP?
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 of our favorite options also provide LP formations ― namely, LegalZoom and BizFilings. Either one of them should do a great job forming your new LP.
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.
Next Steps: What to Do After Creating an Arizona LP
Open a business bank account
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.
Any Arizona LP that hires employees is legally required to have two types of insurance - unemployment insurance and workers’ compensation insurance. In general, you will obtain workers’ compensation insurance through a private insurer, whereas your taxes typically register for unemployment insurance when you register to pay your business and employer withholding taxes. 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.
Income reportingLimited 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.
Limited Partnerships in the State of Arizona do not have any annual filing requirements. However, you may need to renew certain business licenses or permits on an annual basis.
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.