When you are thinking of creating a Partnership, one of the best options to consider is forming a Limited Partnership (LP). The Limited Partnership is basically a Partnership where at least one partner is a general partner. It may be an individual or an entity such as a corporation. The others are all limited liability partners.
To form a limited partnership, you need to file a Certificate of Limited Partnership with the Secretary of State. It is a very easy form that affirms the name of the General Partner.
Typically, the General Partners are responsible for all of the company’s financial obligations, whereas the Limited Partners holds no liability for the company’s obligations, debts, or actions. Usually, the Limited Partners do not engage in the management of the business entity or its assets in any way. It is vital that the Limited Partners avoid any participation in the administration of the company, on any level as involving in management activity will cancel the limitation of personal liability that a Limited Partner experiences.
Why Form a Limited Partnership?
- Limited Partnerships are generally formed by individuals or corporations who have 100% control of their asset or project while introducing heirs or investors on the income from the Limited Partnership.
- Limited Partnerships are free from stock or stockholders. Each Limited Partner has a clearly stated percentage of interest in the profits earned from the entity.
- Limited Partners do not get dividends, but are designated to their percentage of the total income.
Advantages for Each Partner
In the Limited Partnership, one of the greatest benefits for a general partner is that he or she owns most of the power of the business. The limited partners are supposed to participate slightly as compared to the general partner. The general partner can decide in most of the cases and can take the partnership in the direction he or she requires. If there is more than one general partner, the powers are divided equally between them as stated in the partnership agreement.
The main advantage for a limited partner is that he confronts limited liability. For instance, if the business is sued or becomes bankrupt, he is only liable for his share of investment in the business assets. He is not personally liable or can’t be sued individually unless he has done something that has made him personally liable.
Benefits of Limited Partnership
It is same as the general partnership. The profit and loss in the limited partnership flow through the business to the partners. It is taxed on their personal income tax returns. The main difference is that the limited partners get the shares of all the profits and losses, but they are not required to participate in the business itself.
In a Limited Partnership, the limited partner’s obligation for the organization is constrained to the amount of money or property that individual partner added to the partnership. This is not valid for the general partnership, where any money or property contributed becomes an asset to all the partners.
The general partners take charg
In the limited partnership, the general partners manage the everyday operations and obligations and don’t have to counsel the limited partners for most of the business choices.
Establishing a limited partnership, like a general partnership, demands less paperwork than forming a corporation. But it is essential to create and file a partnership agreement in the county where you are starting your business.
No turnover issues
In a Limited Partnership, the limited partners can be substituted or can leave without terminating the limited partnership.
A limited partnership is an amazing approach that offers investors the chance to benefit from the profits and losses of your business without getting them actually involved in the business.
Drawbacks Of Limited Partnership
A limited partnership may require less paperwork than a corporation, but since you have investors or the limited partners, you may still need to hold annual meetings and form a detailed partnership agreement.
Risks of the General Partners
In a Limited Partnership, the general partners must carry the responsibility of all the businesses’ obligation and debts. If the company enters bankruptcy or is sued, all the liabilities and debts are the responsibility of the general partners. Also, each general partner can decide on behalf of the company, and those decisions become the responsibility of all the general partners.
The limited partnership may not live life long. Instead, it lives for a specific period, usually till the life of economic assets.
Expensive to form and operate
To establish a limited partnership, the partners are required to submit the written agreement with the Secretary of State, annual financial reporting to limited partners, and record for all the money received and disbursed.
Lack of control
The limited partners have no say in management once they have invested in the partnership.
Non- liquid investment
Since a limited partnership does not allow the interests to be freely traded. Therefore, a limited partner is expected to hold the investment indefinitely.
The limited partnership must register his securities before they are sold.
Hence, the key to a successful Limited Partnership is the Partnership agreement clearly stating the roles and responsibilities of the general as well as the limited partner. It must be carefully drafted by a professional and properly maintained once formed. If you are not privy on how to create this agreement professionally, consult an expert attorney for the required help!