LP Agreement: Everything You Need to Know
This agreement will define the terms of the partnership and can be used to help resolve future disputes.3 min read
Writing an LP agreement is an important part of forming a limited partnership. This agreement will define the terms of the partnership and can be used to help resolve future disputes.
Basics of an LP Agreement
If you're considering going into business with partners, there are several important steps that you will need to take, including establishing a limited partnership (LP) agreement. An LP agreement can help protect your business in the future and will outline the relationship between you and your partners. All limited partnerships are founded on an LP agreement.
The best way to think about this agreement is as a contract between the partners of a business. The agreement will define the general partner's authority, as well as the limited partner's rights. The agreement will detail the responsibilities of each partner.
Partners in a limited partnership can also use their agreement to outline how to share the business profits. Unlike other business entities, partnerships are not legally separate from the owners of the business. Once you and your business partners have come to an agreement about your rights and responsibilities, you can start focusing on the goals of your business.
There are two circumstances in which you should use a limited partnership agreement. First, if you're planning on forming a limited partnership and want to outline your business, you need an LP agreement. Second, you should use one of these agreements if you want to formalize an existing limited partnership.
One of the best uses of an LP agreement is to assign each partner a specific management role. This excludes limited partners, however, as they usually don't play a part in day-to-day business operations.
There are countless details that you could add to your agreement:
- The address and name of your business.
- Your reason for establishing your limited partnership.
- Voting rights of limited partners, if any.
- A process of making business decisions.
- Ownership percentages and each partner's capital contribution.
Forming a Limited Partnership
Typically, limited partnerships are governed by the Uniform Limited Partnership Act. This Act was last updated in 2013. Before your limited partnership can be valid, it must be registered with the Secretary of State. You should also be sure that you have obtained any licenses and permits required for your business. To find out which licenses and permits you need, you can check with the U.S. Small Business Administration.
Difference Between Partnerships
A limited partnership is one of the many different types of partnerships that you could choose for your business. For example, many people choose to establish a general partnership, a partnership in which every part of the business is distributed equally between partners. This includes management, business debts, and profits.
One form of general partnership is a joint venture, which is a partnership that only lasts until a certain goal has been completed. Limited partnerships are different from other types of partnerships because the partners have limited liability for the debts of their business. The extent to which a partner in a limited partnership is liable for the business depends on how much they have invested in the business.
In a limited partnership, general partners are responsible for running the business. Typically, there will be multiple general partners, although it's possible to have just one. A limited partnership will also have limited partners, also called silent partners. These partners contribute capital to the partnership but have no role in managing the business.
Limited Partnerships vs. LLC
In many regards, limited partnerships are similar to limited liability companies (LLC). For example, both entities can take advantage of pass-through taxation. Both entities can be structured however the partners or members desire. In addition, the responsibilities of partners and members are left to the discretion of the entity.
LLCs and LPs both use internal documents to outline the business. In an LLC, this document is called an Operating Agreement, and limited partnerships use partnership agreements. Pass-through taxation is available for both of these entities. This means that the entity itself will not be taxed at the federal level. Investors of the LLC or LP will instead need to report their portion of the profits and losses in the business.
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