Key Takeaways

  • A Delaware LP (Limited Partnership) consists of at least one general partner and one limited partner.
  • General partners manage the business and bear full liability; limited partners have liability limited to their investment.
  • Delaware LPs are popular for real estate investments and estate planning, especially through family limited partnerships.
  • Filing a Certificate of Limited Partnership and maintaining a Registered Agent in Delaware are key formation steps.
  • Delaware LPs offer pass-through taxation, flexibility in profit sharing, and favorable legal treatment.
  • While limited partners enjoy asset protection, they must avoid participating in management to retain this benefit.

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.

How to Form a Delaware LP

To form a Delaware LP, you must follow specific steps to ensure the entity is recognized and compliant under Delaware law:

  1. Choose a Partnership Name:
    Your Delaware LP must have a unique name that ends with “Limited Partnership” or an acceptable abbreviation like “L.P.” or “LP.”
  2. Designate a Registered Agent:
    The partnership must maintain a Registered Agent with a physical address in Delaware who can accept legal documents on its behalf.
  3. File a Certificate of Limited Partnership:
    This formation document must be submitted to the Delaware Division of Corporations. It includes:
    • Name of the LP
    • Name and address of the registered agent
    • Name and address of each general partner
  4. Create a Limited Partnership Agreement:
    While not required by law, a written LP agreement is highly recommended. It should outline profit sharing, responsibilities, decision-making authority, and dissolution procedures.
  5. Obtain an EIN:
    An Employer Identification Number (EIN) is required from the IRS for tax purposes, even if the LP has no employees.
  6. Register for Taxes and Business Licenses (if applicable):
    Depending on the nature of your business, you may need to register with the Delaware Division of Revenue and obtain any required local or state licenses.

Delaware LP Compliance and Reporting

Once established, a Delaware LP must meet certain compliance requirements to remain in good standing:

  • Annual Franchise Tax:
    Delaware LPs must pay an annual Franchise Tax, which is due by June 1 each year. As of 2025, the flat-rate fee is $300.
  • No Annual Report Requirement:
    Unlike corporations, Delaware LPs are not required to file an annual report.
  • Maintaining a Registered Agent:
    The LP must maintain a registered agent throughout its existence. Failure to do so may result in the loss of good standing or administrative dissolution.
  • Updating Partner Information:
    If general partner information changes, an amendment must be filed with the state to update the Certificate of Limited Partnership.

Delaware LP vs. Other Business Entities

Delaware LPs offer distinct advantages over other business structures, but they may not suit every business type. Consider the following comparisons:

  • Delaware LP vs. LLC:
    • LPs require at least one general partner with unlimited liability, whereas LLCs offer liability protection to all members.
    • LPs are often favored in investment or estate planning, while LLCs are more versatile for active businesses.
  • Delaware LP vs. General Partnership (GP):
    • LPs provide limited liability to investors, unlike GPs where all partners are fully liable.
    • GPs are simpler to form but lack asset protection features.
  • Delaware LP vs. Corporation:
    • LPs avoid double taxation via pass-through taxation, while corporations may be subject to corporate tax and shareholder tax on dividends.
    • LPs offer more flexibility in profit distribution and fewer formalities.

Frequently Asked Questions

  1. What is required to form a Delaware LP?
    You must file a Certificate of Limited Partnership with the Delaware Division of Corporations, designate a registered agent, and optionally draft a partnership agreement.
  2. Do Delaware LPs pay an annual tax?
    Yes, Delaware LPs must pay a flat annual Franchise Tax of $300, due by June 1 each year.
  3. Can a limited partner manage the business?
    No, limited partners must refrain from management duties to maintain their limited liability status.
  4. How is a Delaware LP taxed?
    Delaware LPs benefit from pass-through taxation, meaning profits and losses pass through to partners’ personal tax returns.
  5. Is a partnership agreement required in Delaware?
    No, it is not legally required, but it is highly recommended to outline the rights, responsibilities, and profit-sharing terms among partners.

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