Limited Partnership Rules: Everything You Need To Know
Limited partnership rules outline the guidelines and regulations of a limited partnership.3 min read
Updated November 25, 2020:
Limited partnership rules outline the guidelines and regulations of a limited partnership. To understand limited partnership rules, you must first understand a partnership. A partnership can be formed between two or more people or entities. In some cases, a partnership may also be referred to as a general partnership. A partnership occurs when those who are involved in business together agree to own and operate a business together.
Two main factors to consider are that the two people are co-owners and decide to share profits. However, many other aspects of the business are shared by the partners, including managerial duties, losses, and taxes. If partners decide to take part in a limited liability partnership, it will reduce the risks associated with the shared aspects of the business.
How is a Partnership Created?
A partnership is created at a state level, and each state has its own set of rules for this type of business structure. Partnerships are very easily formed and do not require any type of written agreement, although it is recommended to create one. Once one or more people are working together in a business and sharing the profits, the business becomes a partnership. However, there are certain requirements for becoming a limited partnership.
Requirements for a Limited Partnership
If the partners do not create a written partnership agreement, there is only one requirement they must follow. This is to not draw salaries from the business and to share all business profits and losses between the partners. However, if the partners do have a written partnership agreement, the requirements may differ, depending on the state in which they intend to file. The rules may include a filing fee for the business, a partnership agreement, or a certificate of limited partnership.
Benefits of a Limited Partnership
A limited partnership is a partnership designed to increase the protection of each of the partners. The partnership reduces the risk of certain liabilities related to the business and business practices. A limited partnership reduces some of the risks and disputes that may be present in a general partnership. For example, a limited partnership will protect one partner from the negligence of the other partner in the company if he takes part in dishonest acts, such as accumulating debt. In a general partnership, a partner may not have that protection from the other partner's actions.
Another benefit is splitting profits and losses based on the percentage of ownership for each of the partners. For example, if one of the partners owns 25 percent of the partnership, he would be entitled to 25 percent of the profits and responsible for 25 percent of the losses, unless it has been outlined differently in the partnership agreement.
Filing Taxes for a Limited Partnership
For small limited liability partnerships, the partners typically decide to pass the company's profits and losses through their personal tax returns. This is because it requires less paperwork and is much simpler than filing taxes as a corporation. In this case, the partnership reports the profits and losses on a special from the Internal Revenue Service (IRS). The taxes owed, if any, are then paid on each partner's personal return.
Additionally, the partners are permitted to include business expenses on their personal tax returns. As with profits and losses, the expenses are determined based on the partners' ownership percentage of the company. A few examples of business expenses that can be written off include company start-up costs, operating costs, and equipment purchases.
How is a Limited Partnership Terminated?
Termination or dissolution depends on the details of how the partnership was formed.
- If a written partnership agreement was created, the process for dissolving or terminating the partnership should be included in the agreement. This may allow for certain unforeseen circumstances.
- If a written partnership agreement was not created, it is very easy to terminate the partnership. One of the partners simply has to provide notice to the other partner that he wishes to leave the partnership.
It is much safer to create a written partnership agreement upfront so that the partners are protected from the sudden, unexpected exit of a partner.
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