Limited Partnerships

Introduction

In recent years, Limited Partnerships or "LPs" have become an increasingly popular choice for businesses—especially those involved in real estate or other investment ventures. The main reason is that unlike general partnerships, limited partnerships (as the name suggests) have the ability to limit both the liability risk and the business involvement of certain partners known as "limited partners." This feature is particularly useful for attracting investment partners who'd like to participate in the profits of the business but not necessarily its risks or daily operations. 

A relatively new form of limited partnership—the Family Limited Partnership (FLP)—has also gained popularity in recent years. Designed more as a wealth transfer strategy than a business structure, the FLP allows individuals to transfer personal or business assets into a partnership and then grant limited ownership interests to their children or other family members. This not only works to lower the taxable value of your estate, but also ensures that certain assets remain in the family. 

What is a Limited Partnership?

A Limited Partnership is a business entity comprised of two or more partners who operate or manage a business together. In every Limited Partnership (LP), there are two types of partners—general partners and limited partners.

 

What is a General Partner?

General partners control the company's day-to-day operations and take on the legal debts and obligations of the business. In other words, they run the show. Because they are responsible for any debts or lawsuits incurred by the company, general partners often form corporations or LLCs to protect themselves from liability.

 

What is a Limited Partner?

Limited partners contribute capital to the partnership but do not participate in the daily operations of the company. As an added benefit, they are also shielded from company debts and other liabilities. Limited partnerships are a great choice for individuals who lack the time or expertise to run a business but would like to share in the profits.

 

What is the advantage of forming a Limited Partnership?

  • It's easier to attract investors because as limited partners their only liability is the capital they invest in the business.
  • An LP allows general partners to focus their efforts on running the business.
  • Limited partners can leave or be replaced without dissolving the LP.

Disadvantages of a Limited Partnership

  • Filings, formalities and state requirements
  • General partners assume personal liability unless the partner is an LLC, Corporation or another company that has limited liability protection.

Taxation of Limited Partnerships

For tax purposes, a Limited Partnership typically works like a general partnership. Profits are "passed through" to the partners who report the income on their personal tax returns. Limited Partnerships are frequently formed to acquire, operate and hold real estate.

 


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