This article continues our review of the prominent business structures, namely Business Partnerships. Today we address the question, what is a Limited Partnership.
A limited partnership is a business partnership agreement between two or more partners. At least one partner is a general partner and at least one partner is a limited partner. The general partner is responsible for the management of the company. They bear unlimited liability for its debts and obligations. Limited partners, sometimes called silent partners, enjoy limited liability protection from the debts and obligations of the partnership.
There are four main types of partnerships:
- General partnership
- Limited partnership (discussed in detail below)
- Limited liability partnership
- Limited Liability Limited Partnership
That is a concise definition of a limited liability partnership. Below I’ll go into greater detail on what is an LLP.
Note: I am a small business owner who writes on business-related topics. Such topics often include legal elements. The information here is not legal advice. Utilize the topics here in preparation for your discussion with your legal counsel.
What is a Limited Partnership (LP)
The legal definition of a Limited Partnership as defined by the State of North Carolina:
A Limited Partnership is a partnership formed by two or more persons under the laws of this State and having one or more general partners and one or more limited partners.
This definition is even leaner than my concise definition above. However, there is so much more to a limited partnership than this definition provides.
How to Form a Limited Partnership
A limited partnership is formed when two or more people agree to do business together under the definition of a limited partnership. This agreement is formalized by submitting a registration for a limited partnership. This is accomplished online at your state’s Secretary of State website.
The limited partnership registration established the company with your state. However, it is VERY important to formalize your agreement between the partners. This is accomplished within a partnership agreement
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What is a Partnership Agreement
A Limited Partnership’s partnership agreement documents the power, rights, liabilities, duties, and other important obligations of and between the partners. It typically includes:
- A description of the business
- Establishing contributions of each partner
- Profit and loss distribution
- Management and voting
- The term of the partnership
- Dissolution of the partnership
The partnership agreement and registration for limited partnerships are very important documents. Although you can create these yourself, I highly recommend that you seek legal counsel in drawing up these documents. If you are intent on creating these documents yourself, I suggest utilizing a respected online file creation firm such as LegalZoom.
Cost to set up a Limited Partnership
The cost of establishing an Limited Partnership includes:
- Registering your Limited Partnership with your Secretary of State. The cost varies by state. The cost in North Carolina is $50
- Drawing up your partnership agreement. I recommend consulting an attorney in creating this document. However, there are online file creation firms such as LegalZoom to help with this.
- Licenses and permits
You will also want to consider the cost of insurance!
Limited Partnership Entity
A limited partnership is a separate legal entity. It can enter into contracts, and own or lease property.
Limited Partnership Ownership
Limited partnerships are owned by its general and limited partners. Ownership percentages are documented in their partnership agreement.
Limited Partnership Taxation
Limited partnerships are taxed as partnerships. Therefore they enjoy pass-through taxation. The company documents its profits and losses for administrative purposes. As agreed in the partnership agreement, profits and losses are distributed to the partners. The partners are taxed on their distribution of income from the partnership business.
Limited Partnership Tax Rate
Limited liability partnerships are pass-through tax entities. Partners receive their distribution of profits and losses in accordance with their partnership agreement. Each partner’s distribution is taxed at the individual partners’ level.
You may find the latest individual income tax rates here.
How Frequently is a Limited Partnership taxed
Limited liability partners are taxed annually with their individual income tax filings.
How do Limited Partners get Paid
Partners are compensated as articulated in their partnership agreement. By default, partners are owners and receive a distribution of the companies profits and losses.
Limited Partnership Liability
The general partners have unlimited personal liability for the general obligations of the limited liability partnership; however, each general partner’s liability for the professional malpractice of another partner is limited to his or her capital contribution. The liability of limited partners is limited to their capital contributions. – NCSOS
Limited Partnership Investment Opportunities
The limited partnership’s Limited Partners position makes investing in a limited partnership easier. Limited partners, sometimes called silent partners, are investors in the partnership. Their level of investment, rights, and distributions are documented in the partnership agreement.
Does a Limited Partnership Perpetually Exist
A limited partnership usually terminates upon the death or withdrawal of its partners. Unlike a corporation, a limited partnership does not exist separately from its owners. The partnership agreement articulates the actions permissible when a partner leaves the partnership.
Requirements for the Ongoing Existence
Like all state-sanctioned business structures, a limited partnership must file annual reports with its Secretary of State. Failure to do so jeopardizes its legal status.
Limited Partnership Advantages & Disadvantages
Limited Partnerships have pros and cons which make them ideal business structures for entrepreneurs, managers, and investors.
Limited Partnership Advantages
- Pass-through taxation: An limited partnership is a pass-through tax entity. Partners receive their distributions according to their partnership agreement. The profits and losses are taxed at each partner’s individual tax filings.
- Limited liability protection: Limited partners enjoy limited liability for the partnerships’ debts and obligations, limited to their investment to the partnership.
- Limited partner turnover: Limited partners are able to come and go without dissolving the partnership.
- Investment opportunities: Limited partnership, sometimes called silent partners are great opportunities for investors.
Limited Partnership Disadvantages
General partner liability: General partners have unlimited personal liability for the general obligations of the limited liability partnership.
Conclusion
We’ve addressed the question, what is a limited partnership. As you can see, it is a great partnership vehicle for long-term and short-term (silent) partners.
Note: This article is written based on the definitions established here in the United States of America. Similar business structures exist worldwide. Definitions are different and nuanced based on the jurisdiction in which you reside.
Sources:
- IRS: Partnerships
- North Carolina Legislature: Partnership
- North Carolina Secretary of State: Choose a Business Structure Partnerships
- North Carolina Secretary of State: Limited Partnership Requirements