Limited Partnership Advantages: Everything You Need to Know
Limited partnership advantages not only benefit business but also the limited partners. The advantages include limited liability and investment opportunities.3 min read
Limited partnership advantages not only benefit the business but also the limited partners. The advantages include limited liability and investment opportunities.
About Limited Partnerships
If you want to form a partnership, you might consider a limited partnership, or LP. In a limited partnership, at least one partner will be a general partner. All others will be limited liability partners. Some states call this a silent partnership.
In this business structure, two or more individuals own the business, and it has two different kinds of partners:
- A general partner owns and operates the business.
- A limited partner invests in the business (money or property), but doesn't make business decisions relating to operations and has no personal liability for company debts.
This type of partnership protects limited partners from personal liability, while still giving them the opportunity to invest. General partners still have personal liability.
Advantages for Limited Partners and LPs
Someone who's a limited partner in an LP will probably consider the biggest advantage to be the limited liability. In the event the business is sued or goes bankrupt, limited partners are only liable for their investment in the business. They're not held personally liable. However, if they've done anything as an individual to make them liable, they could be sued as an individual.
Limited partners take no role in the management of the company. They only contribute assets.
The following apply to limited partnerships:
- The limitation on liability for the limited partners is attractive. Business creditors can't go after their personal assets due to the limitations in regards to money and potential lawsuits.
- Investors are often attracted to LPs because they know they'll enjoy limited liability on the company's debts.
- Partners may like the tax structure, where profits and losses pass through the company to the partners. They then report profits and losses on their personal tax returns.
- Limited partners enjoy sharing profits without having to run the business.
- There's an unlimited number of shareholders.
- LPs can utilize the financial and managerial strengths of its different partners.
- There's an unlimited cap on acquiring capital with a partnership agreement.
A limited partnership doesn't have the same formal structure that a corporation has, but it holds other advantages. It's generally easier and less expensive to set up a limited partnership compared to a corporation. Business owners who don't want all of the formalities that exist in a corporation may prefer an LP.
There's also less paperwork involved in forming a limited partnership compared to a corporation. You'll still have to draw up a partnership agreement and file it in the jurisdiction where you do business, however.
Limited partners have peace of mind knowing that if the LP is sued and loses in court, their personal assets are protected. Due to this limited liability, some people choose to set up an LP as an effective way to shield partners' assets from creditors.
In a general partnership, any money or property that an individual contributes to the business becomes an asset that belongs to all parties. This differs from the money or property limited partners contribute — their debt is only limited to the amount they put into the business.
Limited partners who don't want to take an active role in running a business may like being in an LP as a silent partner. They can sit back and let the general partners handle day-to-day operations. If they don't want to make business decisions, this is ideal for limited partners.
Limited partnerships don't end if limited partners leave the business or if the company replaces them. Therefore, the company suffers no turnover problems from limited partners.
Businesses that want to attract investors may prefer LPs. This is a good way to give investors the chance to benefit from investing in your company without giving them roles and responsibilities in running the business.
There are several types of business structures, and each has its unique advantages and disadvantages. If you're unsure which business type is best for you, you might want to consult with legal and tax professionals. They may be able to advise you, especially when you make it clear what your short- and long-term goals are.
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