Frequently Asked Questions Regarding Limited Partnership
The Benefits of Limited Partnerships: Sharing Control and Profits in Business4 min read
Limited partnerships are a type of business structure that allows two or more partners – whether they be individuals or corporations – to share operational control and profits associated with specific business activities. Each partner has a unique relationship to the business, and, depending on how the partnership is structured, the various partners could either have limited or unlimited liability from the business's debts and obligations. As such, there can be multiple scenarios that may position a partner in an advantageous, but also potentially risky, position.
The numerous details and complexities associated with setting up and managing a limited partnership can be daunting, especially for those not drenched in legal terminology and the appropriate regulations. In order to provide some clarity and direction, the questions below unpack the most common queries raised by New Yorkers when considering a limited partnership, as well as provide some additional context concerning current legislation, procedure and regulations as they relate to the State.
What is a Limited Partnership?
A limited partnership is an entity that allows two or more persons or legal entities to operate a business together, and share in the division of responsibilities, risks, liabilities, and profits associated with the partnership's activities. In these arrangements, one partner acts as the General Partner, and has control over and responsibility for the partnership's day-to-day activities. This partner is often referred to as the managing partner, and is treated as the business's sole proprietor or member for tax-related purposes. The remaining partners, known as Limited Partners, are only liable for debts up to the amount of their own contributions, and are not authorized to act as managing partners in the partnership's operations.
How Do You Set up a Limited Partnership?
In New York, the process of setting up a limited partnership is slightly more involved and time-consuming than setting up a regular partnership. As such, the basic steps required for setting up a limited partnership are as follows:
Choose a business name for the partnership.
Form and file a Certificate of Limited Partnership with the New York State Department of State.
Provide a written agreement between all partners outlining rights and responsibilities.
Obtain a tax identification number (usually an Employer Identification Number, or EIN) for the partnership.
Obtain any necessary business licenses or permits for activities within the partnership.
Open a separate bank account for the partnership.
Additionally, the partners may consider drafting a separate Limited Partnership Agreement and filing it with the Secretary of State. This document, which is not mandatory in the state of New York, outlines the specific rights, responsibilities and duties associated with each partner, and can help to clarify and protect the interests of all parties involved.
What Are the Potential Benefits of Wielding a Limited Partnership?
One of the primary benefits of forming a limited partnership is the added levels of liability protection afforded by the structure of the arrangement. Furthermore, the associated tax benefits – with limited partners often required to pay taxes on their share of the partnership's profits, but not taxed on its losses – can provide a valuable cushion to this high-risk business collaboration.
The limited partnership structure also allows investors to join the business without involving themselves too deeply in the day-to-day operation of the business. As a result, the partnerships can bring considerable resources and knowledge into play that may not otherwise have been available.
Are Any Restrictions Associated with Limited Partnerships?
Under New York State Law, limited partners must be listed on the partnership's Certificate of Limited Partnership. Furthermore, as outlined above, limited partners are legally restricted from participating in the management of the partnership, as this could place them in jeopardy of losing their limited liability protection.
This premise is backed up under the New York Limited Liability Company Act, which states that a limited partner who takes part in the management of the partnership may be held liable for the debts or obligations of the partnership. As such, shareholders in a limited partnership should occasionally take stock of the operational status of the business in order to ensure that no limited partner has breached the bounds of their relationship to the business.
Limited partnerships are a popular business structure in New York State, offering a balanced mix of risk and liability protection, as well as potential tax benefits, to those looking to enter into a collaboration of mutual benefit. Nevertheless, as evidenced above, the numerous details and associated complexities of the arrangement demand careful consideration and navigation in order to protect the interests of all parties.
If you're considering a limited partnership in New York State and are looking to ensure the security of your interests and responsibilities, contact experienced UpCounsel business lawyers. With access to thousands of experienced attorneys who can offer quality legal guidance for a fraction of the cost of traditional law firms, UpCounsel should be your first port of call.