What is a Limited Partnership: Everything You Need to Know
A limited partnership (LP) occurs when two or more partners come together to conduct business in & partners are liable for the invested in the business.3 min read
What is a Limited Partnership (LP)?
A limited partnership (LP) occurs when two or more partners come together to conduct business in which only one or more of the partners is liable for the amount of money invested in the business.
Limited partners are not entitled to receive dividends, but they do get access to income flow and expenses. A limited partnership is also referred to as a limited liability partnership, or LLP.
In a limited partnership, the owners are not generally liable for company debts, and the management of the business falls to a general partner who bears all the liability for the LP's obligations and debts.
As such, limited partners are often called "silent partners" because they make investments in the company, but they don't have or want any kind of control or voting power regarding the business' daily operations.
Limited partners are often a valuable source of financial capital, especially when starting a new business.
What is a General Partnership?
In the business sense, a "partnership" usually refers to a general partnership, which is when a business has more than one owner who has not yet filed papers to create either a limited liability company (LLC) or corporation.
All partners in a general partnership are liable for court judgments and business debts, and an individual partner can be sued for any business debt. Each partner can also legally bind the entire business to a deal or contract without the other partners' permission.
General vs. Limited Partners
General partners openly operate a business and manage and control the partnership. Since they have a variety of duties, they are typically paid a management fee. A general partner can also be an entity, such as a corporation, as well as an individual.
By contrast, limited partners are not involved in any type of management activities related to the business or partnership, so they are liable for anything that happens beyond the amount they invested in the partnership.
Even so, if a limited partner does not maintain his role as a "silent partner" and gets more involved in decisions, he will be liable for more. In fact, if a limited partner becomes active in the business, his liability is now considered unlimited.
Forming a Limited Partnership
Almost every state governs how limited partnerships are formed under the Uniform Limited Partnership Act. This act was created in 1916, amended in 1985, and was originally called the Limited Partnership Act. It has been adopted by 49 states and the District of Columbia.
In order to form a limited partnership, partners must register the business in the appropriate state through the local Secretary of State's office. It is crucial to obtain all business licenses and permits as required by your type of business and its location.
Advantages of a Limited Partnership
The advantages of having a limited partnership include:
Personal asset protection – This business structure includes liability protection for the amount of money invested by the partners.
Pass-through taxation – Instead of income being taxed at the business level, profits and losses are "passed through" to existing partners so they can report them on personal tax returns. Limited partnerships are treated like general partnerships where all partners report and pay taxes according to their share of profits. Limited partners, however, are not required to pay self-employment taxes.
Full oversight – A general partner maintains complete control of a limited partnership.
Investment potential – LPs can generate investment capital by adding additional partners.
Heirs are entitled to payments without receiving actual assets, which helps minimize the negative effects of estate taxes.
An LP is generally used:
To develop and expand commercial real estate projects. In these cases, the general partner is the construction manager and organizer, and the limited partner is an investor who puts up the money for the construction project.
In estate planning where the general partner is a parent who owns real estate, and the limited partners are the heirs of the general partner. In this scenario, the limited partnership might be referred to as a "family limited partnership" for obvious reasons. Generally, this option is preferred when the limited partners do not wish a property to be sold after the death of the general partner or parent.
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