Starting a General Partnership Business in Minnesota

Starting a General Partnership in Minnesota

A general partnership is a business owned by two or more persons who associate to carry on the business as co-owners for profit. Under Minnesota’s Uniform Partnership Act, “the association of two or more persons to carry on as co-owners a business for profit forms a partnership, whether or not the persons intend to form a partnership.” Minn. Stat. § 323A.0202. General partnerships have specific attributes, which are defined by Minnesota Statutes Chapter 323A, the Uniform Partnership Act of 1994.

Because formation is automatic, you can find yourself in a partnership without meaning to create one. The statute gives you practical tests: co-ownership of property, such as joint tenancy or tenancy in common, “does not by itself establish a partnership, even if the co-owners share profits made by the use of the property,” and sharing gross returns does not establish one either. If you receive a share of the profits of a business, however, you are presumed to be a partner unless the profits were received in payment of a debt, as wages or other compensation for services, as rent, as a retirement or health benefit, as interest on a loan, or for the sale of the goodwill of a business. Minn. Stat. § 323A.0202(c). If your informal arrangement with a co-owner meets these tests, you are already in a partnership whether you intended it or not.

How Partners Share Management, Profits, and Liability

Unless your partnership agreement provides otherwise, each partner has equal rights in the management and conduct of the partnership business. Minn. Stat. § 323A.0401(f). Each partner is also entitled to an equal share of the partnership profits and is chargeable with a share of the partnership losses in proportion to that partner’s share of the profits. Minn. Stat. § 323A.0401(b). When partners disagree, a difference arising in the ordinary course of business “may be decided by a majority of the partners,” while an act outside the ordinary course of business and an amendment to the partnership agreement require the consent of all of the partners. Minn. Stat. § 323A.0401(j).

Liability is the defining risk of the general partnership form: “all partners are liable jointly and severally for all obligations of the partnership unless otherwise agreed by the claimant or provided by law.” Minn. Stat. § 323A.0306(a). A judgment creditor generally may not levy execution against your personal assets to satisfy a partnership judgment unless a judgment based on the same claim has been obtained against the partnership and a writ of execution on that judgment has been returned unsatisfied in whole or in part, the partnership is a debtor in bankruptcy, you have agreed that the creditor need not exhaust partnership assets, a court grants permission, or liability is imposed on you by law or contract independent of the existence of the partnership. Minn. Stat. § 323A.0307(d). If you join an existing partnership, you are not personally liable for any partnership obligation incurred before your admission as a partner. Minn. Stat. § 323A.0306(b).

General partnerships that have elected limited liability partnership status operate much like general partnerships, but with a critical difference: an obligation of a partnership incurred while the partnership is a limited liability partnership, “whether arising in contract, tort, or otherwise, is solely the obligation of the partnership,” and a partner is not personally liable for such an obligation solely by reason of being or acting as a partner. Minn. Stat. § 323A.0306(c).

Contrary to a common misconception, your general partnership can own assets in its own name. A partnership is “an entity distinct from its partners,” Minn. Stat. § 323A.0201, and “[p]roperty acquired by a partnership is property of the partnership and not of the partners individually,” Minn. Stat. § 323A.0203.

No State Filing Is Required to Form a General Partnership

Minnesota’s partnership statute imposes no state filing or fee as a condition of forming a general partnership: under Minn. Stat. § 323A.0202(a), a partnership forms automatically when two or more persons associate to carry on as co-owners a business for profit, whether or not they intend to form one. A filing with the Minnesota Secretary of State is required only in specific situations, such as an assumed name certificate under Minn. Stat. § 333.01 when the partnership operates under a name that does not set forth the true name of every person interested in the business. An entity formed under a different statute, such as a limited liability company or a corporation, is not a partnership under Chapter 323A, so choosing a filed entity takes you out of the default partnership rules. Minn. Stat. § 323A.0202(b).

It is strongly recommended that the partnership (no matter what type) draw up a written agreement addressing key issues like the allocation of management responsibilities, the distribution of profits and losses, and rights upon termination. Issues commonly addressed in a partnership agreement are discussed below.

Registering the Business Name as an Assumed Name

If your partnership will do business under a name that does not set forth the true name of every person interested in the business, you must file a certificate of assumed name with the Minnesota Secretary of State. Minn. Stat. § 333.01, subd. 1. For a partnership, “true name” means the true full name of each partner. Minn. Stat. § 333.001, subd. 3. Filing alone does not complete the process: the certificate must be published, after it is filed, in a qualified newspaper in the county of your principal or registered office for two successive issues. Minn. Stat. § 333.01, subd. 1. The assumed name also must not include entity designators such as “corporation,” “incorporated,” “limited,” “limited liability company,” or “limited liability partnership” (or their abbreviations) unless you are actually authorized to use them. Minn. Stat. § 333.01, subd. 1. The initial filing fee is $30, and the certificate is effective upon filing and remains in effect indefinitely so long as you file a no-fee annual renewal each calendar year; a certificate expires in the year following a calendar year with no renewal, and an expired certificate may be reinstated by filing the annual renewal with a $25 reinstatement fee. Minn. Stat. § 333.055. Click here for procedures for registering the business name as an assumed name.

Tax Identification Numbers and Employer Accounts

Your partnership must obtain a federal employer identification number (EIN). 26 C.F.R. § 301.6109-1. A partnership doing business in Minnesota must also file Minnesota partnership returns. Minn. Stat. § 289A.12, subd. 3. Be prepared to supply an identifying number on state tax filings: the commissioner of revenue may require that a form filed with the commissioner include the Social Security number, federal Employer Identification Number, or Minnesota taxpayer identification number of the taxpayer or applicant. Minn. Stat. § 270C.306. If your partnership has employees in covered employment, it must register with the commissioner for an unemployment insurance tax account or a reimbursable account upon or before submitting its first wage detail report. Minn. Stat. § 268.042, subd. 1(a). Plan your first hire with the timing rule in mind: a partnership that becomes an employer with covered employment at any point in a calendar year is subject to the unemployment insurance chapter for that entire calendar year. Minn. Stat. § 268.042, subd. 1(c). These taxes and procedures for obtaining tax numbers are discussed in this post on business taxes.

Note that any partner of a limited liability partnership or professional limited liability partnership “is jointly and severally liable for any amount due under this chapter or section 116L.20 in the event the employer does not pay” amounts owed to the Minnesota Unemployment Insurance Program. Minn. Stat. § 268.063(b). That personal liability is imposed by a commissioner’s determination that becomes final unless you file an appeal within 45 calendar days after the notice of determination is sent. Minn. Stat. § 268.063(e). The personal liability also survives dissolution, reorganization, receivership, or assignment for the benefit of creditors. Minn. Stat. § 268.063(d).

Tax Returns and Registrations

For ordinary income tax purposes, the partnership itself is not a taxable entity: “[a] partnership as such shall not be subject to the income tax,” and partners are liable for income tax “only in their separate or individual capacities.” 26 U.S.C. § 701. One qualifier applies for partnership tax years beginning after December 31, 2017: under the centralized partnership audit regime, any adjustment to a partnership-related item is determined, and any tax attributable to it is assessed and collected, at the partnership level unless the partnership elects out or pushes out the adjustment, so a partnership can owe tax directly on audit adjustments. 26 U.S.C. § 6221(a).

The partnership must file an annual federal information return (IRS Form 1065) reporting its gross income, allowable deductions, and each partner’s distributive share. 26 U.S.C. § 6031(a). The partnership must also furnish each partner a copy of that return information (the Schedule K-1) on or before the day the return is due, and that information generally may not be amended after the return’s due date. 26 U.S.C. § 6031(b).

In Minnesota, the partnership must file a return with the commissioner of revenue for each taxable year, reporting the names and addresses of the partners and each partner’s distributive share of income, gain, loss, or credit, and it must furnish each partner a copy of that share information on or before the day the return is filed. Minn. Stat. § 289A.12, subd. 3. For taxable years beginning after December 31, 2020, a qualifying partnership may elect to file a return and pay Minnesota’s pass-through entity tax at the entity level, a workaround to the federal cap on state and local tax deductions; if your partnership makes that election, its Minnesota return is no longer purely informational. Minn. Stat. § 289A.08, subd. 7a.

A partnership that will be selling a product or service that is subject to sales tax also will need to register for purposes of Minnesota sales and use tax by applying for a sales tax permit, with the application filed by a member or partner. Minn. Stat. § 297A.83. If your partnership sells into Minnesota from outside the state and is not required to obtain a permit, it may nevertheless voluntarily file an application for one. Minn. Stat. § 297A.83, subd. 1(b).

Workers’ Compensation Insurance

A partnership that hires employees generally must carry workers’ compensation insurance covering them. Minn. Stat. § 176.181, subd. 2. The coverage mandate does not reach everyone connected to the partners, however: the statute excludes from mandatory coverage the partners themselves and each partner’s spouse, parent, and child, regardless of age. Minn. Stat. § 176.041, subd. 1(5). Coverage for those excluded individuals is optional: the partnership may elect coverage for any partner and for an employee who is a spouse, parent, or child of a partner. Minn. Stat. § 176.041, subd. 1a. You may elect coverage for a partner’s spouse, parent, or child whether or not you elect coverage for the related partner. Minn. Stat. § 176.041, subd. 1a(g). The exclusion covers only a partner’s spouse, parent, and child, so other family members, such as a partner’s sibling, are outside the excluded set. Minn. Stat. § 176.041, subd. 1(5). The same spouse, parent, and child exclusion applies to sole proprietors, so this rule is not unique to partnerships. Minn. Stat. § 176.041, subd. 1(4).

Partnerships that will be hiring employees also should review this post on issues for employers.

Becoming a Limited Liability Partnership: The Statement of Qualification

To become a limited liability partnership, a Minnesota general partnership must first obtain the partner approval required by Minn. Stat. § 323A.1001(b) and then file a statement of qualification with the Minnesota Secretary of State: “[a]fter the approval required by subsection (b), a partnership may become a limited liability partnership by filing a statement of qualification.” Minn. Stat. § 323A.1001(c). The statement must contain the partnership’s name, the street address of its chief executive office (and, if different, of an office in Minnesota, if any), the name and street address of an agent for service of process if the partnership has no Minnesota office, a statement that the partnership elects to be a limited liability partnership, and a deferred effective date, if any. Minn. Stat. § 323A.1001(c).

A Statement of Qualification form containing the required language is available on the Minnesota Limited Liability Partnership forms page of the Secretary of State’s website. Completed forms may be mailed to the Secretary of State’s office (First National Bank Building, 332 Minnesota Street, Suite N201, Saint Paul, MN 55101) or filed by in-person appointment. At least two partners or an authorized agent must sign the form. If you are forming a professional limited liability partnership, additional language is required in the Statement of Qualification electing to operate under sections 319B.01 to 319B.12 (the Minnesota Professional Firms Act), plus a list of the professional services the firm is authorized to provide.

Your partnership’s status as a limited liability partnership “is effective on the later of the filing of the statement or a date specified in the statement,” and it “remains effective, regardless of changes in the partnership,” until it is canceled or revoked. Minn. Stat. § 323A.1001(e). Errors or later changes in the information in the statement of qualification do not affect the partnership’s LLP status or the liability of its partners. Minn. Stat. § 323A.1001(f).

To keep that status, the partnership must file an annual renewal with the Secretary of State once each calendar year, beginning in the year following the calendar year in which the statement of qualification was filed; the Secretary of State must revoke the statement of qualification of a partnership that fails to file its annual renewal when due or pay the required filing fee. Minn. Stat. § 323A.1003. A revocation “only affects a partnership’s status as a limited liability partnership and is not an event of dissolution of the partnership.” Minn. Stat. § 323A.1003(e). A partnership whose statement of qualification has been revoked may apply for reinstatement by filing an annual renewal and paying a $160 reinstatement fee, and a reinstatement relates back to the effective date of the revocation, so LLP status continues as if the revocation had never occurred. Minn. Stat. § 323A.1003(f)-(g).

Foreign Limited Liability Partnerships

Before transacting business in Minnesota, a non-Minnesota (foreign) limited liability partnership must file a statement of foreign qualification with the Minnesota Secretary of State. Minn. Stat. § 323A.1102(a). Minnesota does not require a certificate of good standing or status from the home jurisdiction; the statement must contain only the items the statute lists: the partnership’s name, the street address of its chief executive office and any Minnesota office, an agent for service of process if it has no Minnesota office, any deferred effective date, and the name of the jurisdiction under whose law the foreign limited liability partnership was originally registered. Minn. Stat. § 323A.1102(a). The partnership’s name must end with a limited liability partnership designator such as “Registered Limited Liability Partnership,” “L.L.P.,” or “LLP,” and the partnership may use an alternate name to transact business in Minnesota if it lists the alternate name in the statement. Minn. Stat. § 323A.1102(a)(1). If the foreign partnership has no office in Minnesota, it must designate an agent for service of process in the statement. Minn. Stat. § 323A.1102(a)(3).

The Partnership Agreement

The partnership agreement addresses a number of issues relating to the management and operation of the partnership. In drawing up the partnership agreement, the prospective partners should consult with legal counsel to assure that the needs and desires of the partners and relevant legal issues are addressed. Some of the issues typically addressed in a partnership agreement include:

• Name of the partnership.
• Duration of the partnership.
• Location of its place of business.
• Capital contribution of each partner.
• Whether partners may make additional contributions.
• The level at which capital accounts of the partners must be maintained.
• Participation of each partner in profits and losses.
• The amounts of any regular drawings against profits
• Responsibilities and authority of each partner.
• Amount of time to be contributed by each partner.
• Prohibition of partner’s outside business activities which would compete with the partnership business.
• Name of the managing partner and method for resolving management disputes.
• Procedure for admitting new partners.
• Method of determining the value of goodwill in the business, in case of death, incompetence, or withdrawal of a partner or dissolution of the partnership for any other reason.
• Method of liquidating the interest of a deceased or retiring partner.
• Circumstances under which a partner must withdraw from active participation, and arrangements for adjusting the partner’s salary and equity.
• Whether or not surviving partners have the right to continue using the name of a deceased partner in the partnership name.
• Basis for expulsion of a partner, method of notification of expulsion, and the disposition of any losses that arise from the delinquency of such a partner.
• Period of time in which retiring or withdrawing partners may not engage in a competing business.
• Procedures for handling the protracted disability of a partner.
• How partnership accounts are to be kept.
• The fiscal year of the partnership.
• Whether or not interest is to be paid on the debit and credit balances in the partners’ accounts.
• Where the partnership cash is to be deposited and who may sign checks.
• Under what conditions limited partners may be accepted into the firm, and, if so, who shall be designated as the general partner.
• Prohibition of the partners’ pledging, selling, hypothecating, or in any manner transferring their interest in the partnership except to other partners.
• Identification of material contracts or agreements affecting the liability or operation of the partnership.

This content is part of a series of posts on forming a business in Minnesota.

One more point of reassurance on ongoing compliance: Minnesota exempts nearly all personal property, including ordinary business equipment, inventory, and furniture, from property taxation, subject to enumerated exceptions such as utility distribution systems and flight property. Minn. Stat. § 272.02, subd. 9.

Although general partnerships are fairly easy to form, even experienced entrepreneurs can encounter difficulties. For help starting a general partnership in Minnesota, you are welcome to contact our office for guidance.