Do you want to form a limited partnership (LP) in Maryland, 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 Maryland.
What Is a Maryland 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 Maryland, 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 Maryland state government, and there is also a formation fee involved.
How to Form a Maryland Limited Partnership (in 6 Steps)
Step One) Choose an LP Name
Whereas the state of Maryland 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 Maryland are required to identify as such in their name. This means each LP is required to contain the phrase “limited partnership” as a part of its name. Alternatively, you may choose to include one of the allowable abbreviations: “L.P.” or “LP”. 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 Maryland, or you’ve officially formed your business.
In Maryland, before reserving or registering a name you first need to check its availability. Unless you have received written permission from the business entity to which the name is registered, you will not be able to register a name that is identical or similar to a name that is already in use. This may be done using the state’s Business Entity Search.
If the name is available, you may reserve it by filing a Corporate Name Reservation Application with the Maryland State Department. This will hold the name for a period of 30 days.
Step Two) Designate a Registered Agent
Every limited partnership in Maryland 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 Maryland Secretary of State,
Business entities are required to include a registered agent listed on their formation documents should service of process be necessary at any point. This agent may be either an individual who is a resident of the state or a qualifying business. In either case, the agent must maintain an office at an address with a physical street address.”
Without a registered agent in Maryland, 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.
Doing so requires the completion of the Certificate of Limited Partnership document, which calls for the following information:
- Name of the limited partnership
- Address of the limited partnership’s principal office
- Address of the registered agents
- Name and address of each partner
Cost to Form an LP: Forming a limited partnership in the state of Maryland is free of charge.
Processing Time: The Maryland government has no listed processing times for the Certificate of Limited Partnership document.
Step Four) Create a Limited Partnership Agreement
While not legally required by the state of Maryland, 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.
Limited partnerships are so-called “passthrough” entities, which means that their gains and losses are taxed through the individual partners’ income tax. This happens in lieu of the business itself being taxed. That said, there are several other business taxes that may apply to your Maryland limited partnership.
For example, if your business owns or leases any personal property in the state, it will be required to file a Personal Property Tax Return. Additionally, depending on the nature of your limited partnership, you may need to pay other industry-specific taxes such as motor and fuel tax, retail tax, etc.
Fortunately, the state of Maryland makes establishing your limited partnership’s state-level taxes quite straightforward through the Comptroller of Maryland. Using its resources, you can determine your business tax liabilities and receive information on how to pay all necessary state-level taxes.
Depending on where in Maryland your business is located, you may also need to pay local taxes.
Some cities in Maryland have their own business tax requirements. It’s recommended that you use the Maryland Comptroller’s Directory of Local Offices to identify and contact your local municipality regarding your limited partnership’s local tax liabilities.
Step Six) Obtain Business Licenses and Permits
While Maryland has no general business license that will keep your limited partnership in good standing to operate within the state, it’s likely you’ll need to apply for several other industry-specific licenses on its behalf.
These licenses are granted from different agencies ranging from the Department of Agriculture to the Department of Natural Resources and many others. Thankfully, Maryland strives to make meeting all state-level licensing requirements quite easy. After registering with the OneStop Licensing Portal, you will be informed of what licensing and permit standards apply to your limited partnership.
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 a Maryland 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.
If your Maryland limited partnership has one or more employees, you’ll need to abide by the state’s employer insurance requirements. This requires obtaining both unemployment insurance and workers’ compensation insurance. This can be achieved through the Division of Unemployment Insurance and the Maryland Workers’ Compensation Commission respectively. 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.
All businesses formed or registered in Maryland are required by law to file an annual report. Furthermore, if the business entity owns, leases, or uses personal property located in Maryland then a Business Personal Property Return is due alongside the Annual Report. Both of these can be filed easily through Maryland Business Express (MBE).
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.