What Is a Limited Partnership (LP)?
Let me explain what a limited partnership, or LP, really is. It's a business structure where at least two partners own the company, but only one—the general partner—handles the management. You, as a general partner, take on full liability for the business's finances and operations, while the limited partners are only liable up to what they've invested. This setup is similar to a limited liability partnership (LLP), but unlike LLPs, LPs have that distinct general partner role.
Key Takeaways
If you're considering an LP, remember that it involves at least one general partner and one limited partner. As a limited partner, your liability matches your initial contribution, whether that's money, property, or expertise. The general partner, however, bears unlimited financial liability because they manage everything. You'll need to register the LP in the state where it operates and handle federal taxes accordingly.
Features of a Limited Partnership (LP)
LPs provide a straightforward way for you and others to pool resources, say for buying real estate. The general partner runs the show and faces unlimited liability for that responsibility. Limited partners like you stay out of daily operations, limiting your risk to your investment. You might contribute money, property, skills, or expertise to form the partnership, but once that's done, step back—or you could end up with general partner liability.
Keep in mind that LPs aren't taxed like corporations; they're pass-through entities, so you report your share on personal taxes. All parties should agree on terms before registering, and LPs don't have to be forever—if it's investment-focused, you can set it to dissolve after liquidating assets. Transferring your interest in an LP isn't easy; you'll likely need approval from all partners.
Other Types of Partnerships
LPs share traits with other partnerships, but differences matter, especially compared to general partnerships (GPs) and limited liability partnerships (LLPs). In a GP, all partners manage the business and share full liability, dividing profits equally unless specified otherwise. You might encounter joint ventures as a GP type, where the partnership is for one project and ends when it's done, with everyone sharing liability.
An LLP, on the other hand, has only limited partners with limited liability, and all can manage without a general partner. This spreads risk so no one person carries the full burden of debts or decisions.
How to Form a Limited Partnership
Forming an LP is straightforward if you follow the regulations. Start by choosing a state to register in—maybe where you are or one with better tax benefits. Pick a unique name ending in 'Limited' or 'Ltd.' Then, draft a partnership agreement outlining rights, duties, profit sharing, and potential end dates; this is internal, not filed with the government.
Designate a registered agent to handle official notices, like from InCorp Services. File your Certificate of Limited Partnership with the state's Secretary of State—check local guidelines. Get an Employer Identification Number (EIN) from the IRS for taxes. Secure all required business licenses and permits, varying by state and industry; the SBA website can help if you're unsure. Open a separate business bank account to keep finances distinct, and get insurance to protect against surprises, especially for the general partner.
Advantages and Disadvantages of an LP
Forming an LP has clear benefits: limited partners get protection from major financial risks, everyone handles taxes personally through pass-through, the general partner controls management, and setup is relatively simple. But drawbacks exist—the general partner shoulders all personal liability, limited partners can't help manage without losing protections, and transferring interests or roles is tough.
Pros and Cons
- Pros: Limited partners have limited liability; easy to establish; pass-through taxes for each partner.
- Cons: General partners take full personal liability; only the general partner decides on management; challenging to transfer interests or roles.
LP vs. LLC vs. Corporation
Don't confuse LPs with LLCs or corporations—they differ significantly. In an LP, the general partner manages with unlimited liability, while limited partners invest without managing and have capped liability. An LLC lets all members share management and liability, spreading the risk. Corporations are managed by hired executives overseen by a board elected by shareholders, similar to limited partners, but they pay corporate taxes on profits, making formation more complex than LPs or LLCs. LPs and LLCs both use pass-through taxation, but LLCs can choose other tax treatments like C or S corps.
The Bottom Line
Ultimately, LPs let you pool resources for projects with limited risk for investors, as the general partner handles operations using those investments. You can structure it flexibly, deciding when to end it, making it a practical choice for certain business goals.
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