When you own a business with a partner, a legal entity laying out each person’s responsibilities and liabilities is vital to operating smoothly. For many partnerships, liability is shared equally, as are business operations. If one partner is simply acting as a silent partner, on the other hand, they are unlikely to want to assume the same kind of liability. That’s why state law provides for limited partnerships. If you are considering incorporating as a limited partnership, consult a corporate lawyer from the Priori network to find out what would be required of you, discuss whether or not it might be the best option for your unique situation and draft a partnership agreement.
What is a Limited Partnership?
Limited partnerships, also called LPs, are non-corporate legal entities that consist of at least one general partner who plays an active role in the business and at least one limited partner who plays a passive role. Limited partnerships are common devices used when a third party is interested in helping a general partner fund the business but does not want to be liable for its actions.
Legally and functionally, limited partnerships otherwise are structured and taxed quite similarly to general partnerships. This means that any general partner can bind the business and carry out business operations. Generally, partners are taxed on the income of the LP as if it were personal income, making the LP only a pass-through entity.
Roles of Partners in an LP
All LPs must have both at least one general partner and at least one limited partner, but these partners serve very different roles.
General partners in an LP have an active role in the day-to-day operations of the business and control all business decisions. They also are personally liable for the debts and lawsuits of the partnership. This liability is unlimited, which means that if the partnership does not have sufficient funds or assets to cover the debts, your personal assets can be liquidated.
Limited partners play a passive role in the business. There are three main factors that legally differentiate them from general partners.
- They do not actively participate in the partnership’s operations. Limited partners invest money only. They do not control business decisions or operations.
- They are not personally liable for the business. Limited partners can only lose their investment in the business. They are otherwise not personally liable.
- They are generally exempt from self-employment taxes. While limited partners still are responsible for individually reporting and paying taxes on their share of the profits each year, limited partners do not have to pay additional self-employment taxes, since they are not involved in the business. They can generally report income as investment gains.
It’s important to note that in most states a limited partner can be held liable just like a general partner if they are determined to be playing an active role in business operations.
State Law and Limited Partnerships
In the U.S., limited partnerships are defined and regulated by state law. This means that the laws that apply to them and the way they operate differ slightly from state to state. Because of this, LPs are generally not an appropriate choice of business structure if you plan to operate in multiple jurisdictions.
The cost of a Priori lawyer who can help you form a Limited Partnership and draft the necessary documentation starts around $150 per hour and ranges up to around $450 per hour. Fixed fees may also be available depending on your needs. In order to get a better sense of cost for your particular situation, put in a request to schedule a complimentary consultation and receive a free price quote from one of our lawyers.
What’s the difference between a limited partnership and a limited liability partnership?
While these terms are often used interchangeably, most states legally differentiate between limited partnerships and limited liability partnerships. In limited partnerships, general partners still assume liability for the company beyond the assets held within the partnership. In limited liability partnerships, however, all partners can potentially limit their liability. The exact difference does change a bit from state to state, though.
How do I formally create an LP?
Because LPs are corporate entities defined under state law, it will depend on where you operate your limited partnership. Generally the process is fairly straightforward, requiring only a fee and certain paperwork. If you are planning to form a limited partnership, consult a corporate lawyer about the process in your state. They may also be needed to create a "certificate of limited partnership,” which functions similar to the operating agreement of a corporation or an LLC.