Limited Partnership: Definition, Example and Advantages
While getting entry into the field of business as a small owner, then it is important to pick up the right type of structure for its establishment. Out of all different kinds of business structures, you will get a raise in your investment by opting for a limited partnership from getting a group of investors but it is usually a good option for all sort of business circumstances.
Limited Partnership: Definition, Example, and Advantages
Let us shed light on this type of partnership and get to know all aspects of it before finalizing it for any business type.
Also See: Memorandum of Association
Overview of limited partnership
As the name implies, it is a type of business structure that comprises more than one business owner, one should be the general owners and the other is a limited partner. A general partner makes some business decisions, taking all responsibilities, and is in charge of all debts as well as lawsuits of the business.
On the flip side, limited ones are the only investors and they do not have any control over the routine operations of the business and they are liable for what they invest in the business. If the limited partner gets into the day to day matters of the business, then they lose their limited liability and get responsible for all debts and lawsuits as similar to the general partner.
What is a limited partnership?
It is a type of business structure that is owned by two or more partners. General partners own as well as operate a business while limited partners do not have such rights as they can invest only. All the operational decisions and personal liability belong to the general partner only.
According to section 102(11) of ULPA, a limited partnership is explained as “a partnership formed by two or more persons under the laws of the state and having one or more general partners and one or more limited partners.”
It suits the type of partnership that is required in case of some specific business situations that emphasize limited-term projects such as creating a movie or developing real estate and it is used by private equity firms too.
Let us take an example to understand the theoretical definitions of limited partnership below.
John, Nick, and Ted decide to establish the Brothers, which is a limited partnership. “The Brothers” is a limited partnership business that is engaged in buying and selling residential real estate. John is the general partner as he is managing all business activities actively. It indicates that John has unlimited liability.
On the other side, Nick and Ted have no active role in the business and thus, they are sleeping partners. Both of them are deemed to be limited partners who invest in the business but have no active role.
After a few years, a client finds some issues in the structure of the home that was sold by John. The client sues John personally as he is a full-time partner. But can’t sue Nick and Ted as they are limited partners and has no active partaking. Nick and Ted lose their partnership from the business.
Also See: Sole Proprietorship
How does it work?
There should be at least one member of the partnership who will be responsible for keeping the daily activities on track. This general partner can be a person, an entity, or even a corporation as well. The partners make the decision and it will affect the company. Thus, they are liable for all debts & lawsuits as included in the business.
A limited partnership includes one or more partners and they can also take as silent partners sometimes. They are considered as passive owners who have no participation in the management and business activities as well. The liabilities are only limited to their investment and that they owe in the partnership and also, like owners.
When it comes to taxation, then the business tax pass-through all partners and paid by each partner as per their share in the business. The process and the share is called Distributive share and pass by the personal tax return of the owner as well as income taxes filed at the time of the personal tax rate of an individual.
How to form a limited partnership?
If you have decided on a limited partnership company, then you need an attorney and an accountant before you starting splurging money as well as time. Although if you have done the research, then these pros can offer advice that is too specific to the business and either affirms that you are taking the right decision.
Registering a limited partnership company differs by each state but some steps are too common everywhere. Let us have a look at these below.
- Choose the state to register in
The need for forming a company under a limited partnership varies by state and you need to choose the company that offers you more advantages. Moreover, find info related to the state’s rules and fulfill all your requirements accordingly.
- Register with the state you select
To form a limited partnership company, you need to file with your agency and generally, with the secretary of the office based in the state. For instance, take a look at fees and how to establish a company according to their policies. Your application will ask for the name that includes the terms “LP”.
- Set up an agreement in a limited partnership
It is a legal document that underlines the role of the general partner and limited partners. The agreement ought to describe how revenues, as well as losses, get segregated among partners. You can take an advice from Attorney or can do it yourself.
Here are some of the aspects of this kind of partnership where the partners share separate roles and responsibilities. Let us take a peek at the positive sides of limited partnership which have been given below.
- Good options to raise funds
A limited partnership is another way to raise capital for the establishment and growth of the business. As the whole responsibility lies in the general partner, so he or she can garner investments from family members but still keep full control over the business-related activities.
Through the partnership, the profits as well as losses under a limited partnership flow across the business to their partners, all of whom get taxed based on income tax returns. The slightest difference here is that limited partners have a relationship with the business’s revenue and loss but they don’t participate in the daily operations.
- Liability limits
The liability of a limited partner is restricted to the debt of a partnership that is limited to the money or property that an individual invested for business expansion. This is not true in the case of a general partnership where any money or property invest in business becomes the asset of all partners.
- A charge is in hands of general partners
In a limited partnership, the partners deal in daily activities and duties and do not require to consult with the limited partners for taking most business decisions.
- No issues with turnover
There are no troubles related to turnover as the limited partners can be either replaced or leave with no dissolution of the limited partners.
- Less paperwork
Forming a limited partnership needs less paperwork as compared to that of a corporation. On the flip side, it is vital to establish as well as file an agreement in the nation where the company does business.
- Investment opportunities
This partnership type is a great way to proffer investors the chance to get the advantage of all business-related profits as well as losses with no involvement in it.
- Protect personal assets
It can be understandable by the example that we have explained above that the limited partners have no involvement in the business activities. In case of any customer problems, the client will not sue any limited partner personally.
- No managing issues
In a limited partnership, it is the general partner who has all responsibilities related to the business from making decisions to get informed of all business ups and downs. Even they need to take some managerial decisions that are not at all required in the case of limited partners.
Disadvantages of establishing a it
Here is the flip side of the limited partnership that we are going to enlisted below. Let us show you below.
- Risks to the general partners
In the case of a limited partnership, a general partner shoulder the responsibility of all debts and obligations associated with the company. If the company gets into bankruptcy or any such issues, then the debts along with liabilities are the duties of the general partners. Each partner can make decisions on the company’s behalf and those decisions become the duty of all the general partners.
- Compliance challenges
Fewer paper formalities are required in case of a limited partnership. But you have a lot of investors and you need to organize annual meetings to create a detailed partnership agreement.
General partnership versus limited partnership
There are three types of partnerships such as general partnership, joint venture & the last one is a limited partnership. They all differ in various manners but share some similar features. Due to the similarities, people get confused between General and limited partnerships which we have mentioned below.
|Particulars||General Partnership||Limited Partnership|
|Definition||It happens when all partners equally agree to share all legal liabilities, losses, finances, and profits.||It happens when the responsibility of a limited partner is restricted to the investment amount.|
|Sharing of Profits||Shares among the partners equally.||Shred based on the amount of capital invested by each partner.|
|Management||Complete control is held by the general partner on the business and sits over the management.||No management controls.|
|Personal liability||The general partner is responsible for all debts incurred by the business and also, taken over of asses in bankruptcy.||No debt burden and there is no personal seize of assets.|
|Legal power||They can bind deals as well as decisions legally.||No legal power.|
|Business structure||Easy and simple.||It is a bit complex as it forms of general and limited partners.|
The Bottom Line
In a nutshell, a limited partnership company is a kind of business structure that is owned by more than one person. But it has two partners, such as general and limited partners. The process is too simple as the general partner can take decisions and take on the full liability.
But the limited partner has no participation in the daily business activities and management. But they have a share in investment, profit, and taxes as well. Therefore, it is a good type of business structure for those who want to run a business but do not want to get participated in it.