How to Form a Limited Partnership in Delaware

What Is a Delaware Limited Partnership?

Before delving into the formation process, it's crucial to grasp the concept of a Delaware Limited Partnership. Unlike a general partnership, an LP has at least one general partner and one limited partner. General partners actively manage the business and bear personal liability for its debts, while limited partners are often passive investors with limited liability, akin to "silent partners."

One notable difference is that forming a general partnership in Delaware is informal, requiring no state filings or fees. Conversely, an LP involves a formal process with the state government and associated fees.

How to Form a Delaware Limited Partnership (in 6 Steps)

Step 1: Choose an LP Name

Selecting an appropriate name for your limited partnership is essential. Delaware mandates that LP names must include "Limited Partnership" or abbreviations like "L.P." or "LP." You cannot use words that imply a different business structure (e.g., "corporation" or "incorporated") or those typically associated with specific business types (e.g., "bank" or "law office").

Consider including descriptive terms in your name to indicate your business's nature, such as "real estate" for a realtor LP. Ensure the name sounds appealing when spoken and looks professional when written.

To secure your chosen name, you can reserve it with the Delaware Division of Corporations by filing an "Application for Reservation of Limited Partnership Name." This reservation is valid for 120 days and costs $75.

Step 2: Designate a Registered Agent

Every Delaware LP must designate a registered agent, an individual or service that accepts official documents and legal notices on your LP's behalf. The registered agent must maintain a physical address in Delaware and be available during regular business hours.

Choosing a registered agent service is a prudent choice, as it helps protect your privacy and keeps your personal and business addresses off public records.

Step 3: File the Certificate of Limited Partnership

To formally establish your LP, you'll need to file the "Certificate of Limited Partnership" with the Delaware Division of Corporations. This document requires basic information:

• Name of the limited partnership.
• Address of the limited partnership.
• Names and mailing addresses of each general partner.
• Signature of an authorized person.

The certificate can be completed as a PDF file online and mailed to the Delaware Division of Corporations. The filing fee for forming an LP in Delaware is $200.

Step 4: Create a Limited Partnership Agreement

While not mandated by the state, a limited partnership agreement is a vital document outlining key operational details of your LP. This agreement clarifies the terms between general and limited partners, including:

• Partnership term.
• Roles and identities of partners.
• Capital contributions.
• Profit/loss allocation.
• Management structure.
• Voting rights.
• Record-keeping practices.
• Conditions for transfers and dissolution.

Step 5: Handle Taxation Requirements

• Federal Requirements: Obtain an Employer Identification Number (EIN) from the IRS, even if your LP has no employees. An EIN serves various purposes, such as hiring employees and opening a business bank account. You can obtain an EIN for free through the IRS.
• State Requirements: Delaware LPs may face state-level taxes depending on their business activities. Different industries may have specific taxes, such as motor vehicle tax, rental property tax, or retail tax. Delaware's "Annual Tax" of $300 applies to all businesses, including LPs.
• Local Requirements: Check with your local municipality, such as Wilmington or Dover, for any additional local taxes or licensing requirements.

Step 6: Obtain Business Licenses and Permits

Delaware LPs need a general business license, which can be obtained online through the "One Stop Business Registration and Licensing" system or by filing the "Combined Registration Application" by mail. Depending on your business type, you may also require industry-specific licenses or permits.

Next Steps: What to Do After Creating a Delaware LP

1. Open a Business Bank Account: Separate your personal and business finances by establishing a business bank account. Use your EIN from the IRS to set up the account.
2. Business Insurance: If your LP has employees, obtain workers' compensation and unemployment insurance. Consider general liability insurance and industry-specific policies for comprehensive coverage.
3. Income Reporting: LPs do not file separate business tax returns. Income passes through to partners, who report their share of profits or losses on personal tax returns. File an annual information return with the IRS to report business income, deductions, gains, and losses.
4. Annual Reporting: Delaware LPs do not need to file annual reports with the state.
5. Accounting: Consider hiring a professional accountant to manage your LP's finances, ensuring accurate record-keeping and compliance with tax regulations.

Conclusion

Forming a Delaware Limited Partnership offers unique advantages but involves a formal process with state requirements and fees. By following the steps outlined in this guide and seeking professional assistance when needed, you can establish and manage your LP successfully while maximizing its benefits.

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Disclaimer: The content on this page is for informational purposes only and does not constitute legal, tax, or accounting advice. Seek the counsel of a licensed professional for specific questions related to these topics.