Limited Partnership: Everything You Need to Know
A limited partnership (LP) is formed when at least two individuals decide to create a business together. Unlike other partnerships, there must be at least one limited partner and one general partner in the business relationship.3 min read
2. What Makes a Limited Partner Special?
3. Why Is a Limited Partnership Important?
4. Do Not Create a Limited Partnership If:
5. Create a Limited Partnership If:
6. Limited Partnership vs. No Limited Partnership Examples
7. Common Mistakes With Creating a Limited Partnership
8. Frequently Asked Questions
9. Steps to Create a Limited Partnership
What Does a Limited Partnership Mean?
A limited partnership (LP) is formed when at least two individuals decide to create a business together. Unlike other partnerships, there must be at least one limited partner and one general partner in the business relationship.
Importantly, the "general partner" has unlimited liability for the company's debt and obligations.
There can be any number of "limited partners" who don't share managerial roles, but their liability is limited to the total amount of liability invested in the company. "Limited Partners" are also called "silent partners" since they can invest in the company, but they have no voting power, do not receive dividends, nor have control of the daily operations.
A limited partnership is not a limited liability partnership (LLP) because all members in an LLP have limited liability. At least one person in a limited partnership must take on the general partner role, but the general partner role can also be shared.
What Makes a Limited Partner Special?
- Limited partners are barred from having an active role in the company.
- Limited partners avoid personal liability.
- General and limited partners face different rules on taxation.
Why Is a Limited Partnership Important?
A limited partnership allows two or more people to create a business structure and protect themselves. Although general partners can still be held liable, general partners' and limited partners' shares are protected from personal lawsuits. Health insurance, pension plans, and other deductions can also be taken.
A limited partnership also allows entrepreneurs to attract passive investors. Limited partners will share in the profits without facing substantial liability, so they're more likely to help fund a business. It's important they don't get too involved in the business, otherwise they could lose their limited partner status.
Some advantages of a limited partnership include personal asset protection, taxation on the personal level only, full managerial control by the general partner, and the potential of adding more partners for additional capital investments.
Do Not Create a Limited Partnership If:
- All members of partnership will engage in managerial activities.
- The general partner doesn't want to face liability without the help of limited partners.
- Business purposes would be better suited as a LLC or another structure.
Create a Limited Partnership If:
- You're involved in a temporary business project that could later become a limited liability company.
- Not all partners have the skill or expertise to handle managerial duties.
- Partners want to own part of a business without having to participate much.
Limited Partnership vs. No Limited Partnership Examples
- If a limited partnership gets sued for $20,000, the limited partners would only be liable for their stake in the business. Without an LP formed, all partners would share equal responsibility.
- Filing for a limited partnership requires minimal paperwork. Filing as a corporation instead requires much more legwork.
- In a limited partnership, limited partners can resign or die without harming the partnership. Without a limited partnership, the business structure is often dissolved.
Common Mistakes With Creating a Limited Partnership
- Limited partners getting too involved in daily operations.
- Not filing the appropriate paperwork with the state.
- Not having a signed agreement between all partners, general and limited.
Frequently Asked Questions
How are limited partnerships and general partnerships different?
In general partnerships, all members are jointly liable for losses.
Why are limited partnerships usually formed?
Limited partnerships are often formed for short-term projects or so that businesses can invest with other companies.
Can limited partners pull their investment from the partnership?
No. Limited partners can only get their investments back with the permission of general partners.
Steps to Create a Limited Partnership
- Create a business name. This will be necessary for all official documentation.
- Create a limited partnership agreement. Not all states will require this step, but it provides more protection for partners.
- Hire a registered agent if doing business in another state that requires such an agent.
- Fill out the state's Certificate of Limited Partnership. Without this step, your partnership will not exist.
- File for an EIN and state ID number.
- Open bank account for the partnership. This will provide additional commercial loan and other options.