Limited Partnership
Limited partnerships (LP) are a popular business structure for many legal, accounting, and other professional firms. We prepare and file the government paperwork to set up your limited partnership.
What Is a Limited Partnership?
Limited partnerships consist of two different types of partners:
- General partner(s), who manage and control the business's day-to-day operations and who have unlimited personal liability for the debts and obligations of the partnership.
- Limited partner(s), who act as passive investors with limited liability, but who are prohibited from participating in the management of the business.
A limited partnership has one or many general partners and one or many limited partners. Limited partnerships are a popular business structure for businesses that work on a project basis for a set period of time, such as real estate investments.
Each general partner is unlimitedly liable for the business's debts and obligations, while each limited partner is only liable for the amount they invested in the company.
Limited partners are “silent partners” in that they invest money in the business but do not have voting power or control over management decisions. By adding investors as limited partners, limited partnerships offer great potential for attracting investment capital.
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What Are the Advantages and Disadvantages of a Limited Partnership?
Running a limited partnership has advantages and disadvantages as with any entity type. Before starting a business, you need to know what to expect and what troubles you could run into before starting a business.
Advantages
- Limited protection for limited partners. One of the most significant advantages of running a limited partnership is the sharing of responsibility among partners. Limited partners are not personally liable for any debts that the business runs into, and they cannot be held responsible for more than what they contribute.
- Shared responsibilities. Limited partnerships allow for a distribution of the workload. With partners’ different skills, the workload can be split up, which can result in more effective end results.
- Generous capital amount. The initial amount of capital contributed for a limited partnership can be substantial. Generous funding can automatically increase the scope of a business.
Disadvantages
- General partner liability. General partners are held personally liable for debts the business incurs. For example, general partners are at maximum financial risk if a limited partnership goes bankrupt.
- Agreement breaches. In a limited partnership, every partner’s opinion matters. In the event partners disagree on decisions, disputes could occur. If a dispute results in a breach of agreement, the entire business could be at risk.
- Limited partners, limited decision-making. Limited partners do not have a complete say in business decisions. Depending on the relationships between the partners, there could be inconsistencies in decision-making.
How Do You Form a Limited Partnership (LP)?
To form a limited partnership, you typically need to follow these steps:
- Choose a name for the limited partnership that complies with state naming requirements and is distinguishable from other businesses. The name usually must contain "Limited Partnership" or an abbreviation like "L.P."
- Identify and designate the general partner(s) who will manage the limited partnership's operations and have unlimited personal liability for its debts and obligations.
- Find one or more limited partners who will invest capital but have limited liability up to their investment amount and no management control.
- Draft and execute a limited partnership agreement that outlines the rights, responsibilities, profit/loss allocations, and other terms governing the partners' relationship. This is an internal document not filed with the state.
- File a certificate of limited partnership with the secretary of state or other designated state agency. This document formally creates the limited partnership entity and includes basic information like its name, registered agent, general partners' names and addresses, and any other state-required provisions.
- Publish a notice of the formation in a local newspaper if required by state law.
- Obtain any necessary business licenses and permits to operate legally.
- Hold an organizational meeting to approve the partnership agreement and appoint initial officers if desired.
What Are Articles of Limited Partnership?
Articles of limited partnership are the legal documents filed with the secretary of state or equivalent office to officially form and register a limited partnership business entity. The articles typically include the following key information:
- Name of the limited partnership
- General nature of the business and its purposes
- Address of the principal office or place of business
- Address of the registered agent
- Names and addresses of the general partner(s) who will manage the entity
- If the limited partnership has a defined term or duration, the latest date of dissolution
- Other provisions required by the state's limited partnership act
Once the articles are filed and approved, the legal entity officially exists and is able to operate. Unlike the private partnership agreement that governs internal operations, most states make articles of limited partnership a matter of public record.
Appointing a Registered Agent for a Limited Partnership (LP)
Limited partnerships are formed in the state where the partners conduct business. In addition to registering as a limited partnership with the state, you must appoint a registered agent.
A registered agent is a business’s legal appointee to receive notice of lawsuits and other legal or government notices during regular business hours. State law requires every limited partnership to have a registered agent. A registered agent must have a physical office address in the state where you conduct business. The documents they collect are often time-sensitive, so choosing a reliable registered service agent is essential.
Harbor Compliance is also a nationwide registered agent provider. We support your company as it grows, offering local offices with same-day document scanning. Easy online ordering means you have service in minutes. View our service page or contact us for more information.
FAQs
A limited partnership is a type of business structure that combines elements of partnerships and corporations, offering a blend of limited liability and pass-through taxation.
While both limited and general partnerships are business structures that involve two or more people joining together to run a business, they differ in terms of liability and management roles.
| Feature | Limited Partnership (LP) | General Partnership (GP) |
|---|---|---|
| Partners | Allow both general and limited partners | All partners are general partners |
| Liability | Unlimited for general partners; limited for limited partners | Unlimited for all partners |
| Management | General partners manage; limited partners are passive | All partners manage the business |
| Formation | Requires a state filing | This can generally be done without a state filing |
| Taxation | Pass-through | Pass-through |
Limited partnerships are often made between general partners and limited partners.
General partners manage the day-to-day operations and make business decisions for the partnership. They have unlimited liability, meaning they are personally responsible for the debts and obligations of the partnership.
Limited partners, on the other hand, typically contribute capital and share in the profits, but they do not participate in management. Their liability is limited to the amount of their investment in the partnership, protecting their personal assets from business debts.
The advantages of forming a limited partnership are as follows:
- Limited Liability: Protects the personal assets of limited partners.
- Pass-Through Taxation: Avoids double taxation by passing income directly to partners.
- Attractive to Investors: Allows passive investors to participate without managing the business.
- Flexibility: Limited partnerships offer flexibility in the allocation of profits and losses among partners, which can be customized in the partnership agreement.
The disadvantages of forming a limited partnership are as follows:
- Unlimited Liability for General Partners: General partners are personally liable for business debts.
- Complexity and Cost: Setting up and maintaining a limited partnership can be more complex and expensive than other business structures.
- Limited Role for Limited Partners: Limited partners cannot participate in management without risking their liability protection.
Limited partnerships are formed by filing the necessary paperwork with the state government, usually a certificate of limited partnership. The process includes drafting a partnership agreement that outlines the roles, responsibilities, and profit-sharing arrangements between partners and appointing a registered agent.
Limited partnerships are often used in industries and situations where significant capital investment is needed but where investors prefer not to be involved in management. Common examples include real estate ventures, film production, and investment funds.
In certain circumstances, yes, a limited partner can potentially lose their limited liability protection and become personally liable for the debts and obligations of the partnership:
- If the limited partner takes an active role in the management and control of the business beyond what is permitted by law.
- If the limited partner's actions lead creditors to reasonably believe they are a general partner, for example, representing themselves as having control over the business.
- If the limited partner fails to make their agreed capital contribution to the limited partnership.
- If the limited partner engages in illegal activities or gross negligence related to the limited partnership's business.
- If the limited partnership fails to properly maintain corporate formalities and separateness from its owners as required by state law.
The specific dissolution procedures should be outlined in the limited partnership agreement. Generally, it involves winding up the business affairs, settling liabilities, disposing of assets, and distributing any remaining assets to the partners according to their interests.
Key steps include:
- Reviewing the partnership agreement for dissolution provisions and following them.
- Filing a certificate of dissolution with the state.
- Settling outstanding debts and obligations to creditors.
- Terminating contracts, licenses, and registrations.
- Distributing remaining assets to partners per their interests.
- Notifying relevant parties like creditors, partners, and authorities.
Properly dissolving per the agreement and state laws is crucial to avoid potential liabilities for the partners after dissolution.
- Limited partnerships must maintain a registered agent in the state of formation for receiving official notices and service of process.
- Many states require limited partnerships to file an annual report and pay annual fees/taxes to maintain their registered status.
- General partners must hold regular meetings with limited partners as specified in the partnership agreement and keep meeting minutes.
- Limited partnerships must manage their tax filing obligations including filing an annual information return (Form 1065) with the IRS to report the partnership's income, deductions, gains, losses, etc., and providing each partner with a Schedule K-1 annually, detailing their share of the partnership's income, deductions, credits, etc. for the partners to report on their individual tax returns.
- Limited partnerships must obtain any required business licenses and permits for their operations at the state and local levels.
Yes, limited partnerships have the ability to modify their governing articles over time by filing the appropriate certificate of amendment with the state, as long as the changes comply with the state's limited partnership act and approval requirements. Properly amending the articles is important for keeping the LP's public record up-to-date.
State Information
