Delaware Limited Partnership: Everything You Need to Know
A Delaware Limited Partnership refers to a business entity in the state of Delaware that consists of at least one general partner and at least one limited partner. 3 min read
2. Uses of Limited Partnerships
3. Why Form a Limited Partnership?
4. Advantages of a Limited Partnership
Updated November 2, 2020:
A Delaware Limited Partnership refers to a business entity in the state of Delaware that consists of at least one general partner and at least one limited partner. The general partner can be either an individual or an entity, such as a corporation.
What Is a Limited Partnership?
A limited partnership is one way that you can organize your company to protect the assets of the owners. With a limited partnership, the limited partners are only liable for the lawsuits or debts for which they are directly responsible. On the other hand, general partners face liability for all of the financial obligations of a company.
Typically, general partners hold all the responsibilities and rights of managing a business entity. This includes the activities and financial matters of the business entity. General partners also possess general liability for the obligations, debts, and activities of the limited partnership.
Usually, limited partners do not participate in the properties or management of the business at all. Limited partners must avoid participating in the company's management on any level. If a limited partner participates in the management of the company, he will no longer be free from personal liability for debts and lawsuits related to the business.
The Limited Partnership Act in Delaware governs limited partnerships. The Limited Partnership Act allows the formation of a partnership as long as the partnership possesses at least one general partner and more limited partners. To form, run, or end a limited partnership in Delaware, you need to follow all the filing requirements and state guidelines.
Uses of Limited Partnerships
In general, limited partnerships are only used for the two following purposes:
1) To create commercial real estate projects where the limited partner is responsible for investing money for the project while the general partner is the manager and organizer for the maintenance and construction of the project. The limited partner receives a return from the income stream of the completed project.
In such a case, the limited partner serves as a passive investor. Apartment complexes and shopping malls are a few examples of projects that can be managed and built by using a limited partnership.
2) To take advantage of an estate-planning vehicle. The limited partners serve as the heirs for the general partners while the general partners are the parents who possess the real estate. Usually, the real estate is commercial.
This type of limited partnership is often called a Family Limited Partnership and is most advantageous when the limited partnership's asset has an income stream, and the parties involved don't want the asset to be sold after the death of the general partner.
In most cases, if the limited partners follow all the IRS regulations and laws related to limited partnerships, the most that each limited partner can lose is the amount invested in the partnership or the amount received in the limited partnership.
No court has the ability to reach into a limited partner's assets to satisfy the obligations or the debts of the limited partnership as a business entity.
If a limited partner starts participating in company management, he risks personal liability. A limited partnership will have the same legal exposure as a general partner if he starts participating in management.
Why Form a Limited Partnership?
Limited partnerships are generally formed by corporations or individuals who want to maintain complete control of the project or asset while allowing heirs or investors to receive income from the entity.
Limited partnerships do not have stockholders or stock. Each limited partner will receive a pre-established percentage of interest in terms of the income from the limited partnership. While limited partners don't get dividends, they are entitled to shares of the income. There is no cap on the number of limited partners that a limited partnership can have.
Advantages of a Limited Partnership
Some of the advantages of a limited partnership include the following:
- Protection of personal assets for the limited partners.
- Pass-through taxation.
- The general partner possesses complete control of the entity and its assets.
- High investment potential for passive investors. Long-term rents are included in investment potential.
- Heirs can receive payments without getting the assets. This reduces the estate tax consequences and keeps the income stream intact.
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