Limited Partnership (LP)

Limited Partnership (LP)

Limited partnerships have both general partners and limited partners. General partners are responsible for the management of the LP and have unlimited liability.


Overview

Main Guide: Starting a Business.

There are two types of partnerships:

General partnerships consist of two or more partners; these partners jointly manage the company's day-to-day operations and share responsibility for the company's debts and liabilities. Each partner contributes to the partnership - financially and in equity - and shares in the business' profits and losses.

Limited partnerships have both general partners and limited partners. General partners are responsible for the management of the LP and have unlimited liability. Limited partners are usually investors who do not have day-to-day responsibilities and have limited liability, meaning they cannot be liable for any amount greater than their original investment in the partnership.


Taxes

Main Guide: Taxes

A limited partnership is a "flow through" entity. This means that the entity does not file a tax return. Rather, all profits and losses incurred by the business are reported by the partners on their personal income tax returns.


Pros & Cons of LP

Pros:

  • Less formation paperwork. Just like a general partnership, creating a limited partnership requires less paperwork than forming a corporation. However, be sure to create a partnership agreement in the county where your company does business.
  • Tax benefits. Similar to general partnerships, the profits and losses in a LP flow through the company to the partners. The partners are then taxed on their personal income tax returns. The difference is that in a LP, the limited partners get to share in the profits and losses without having to participate in the business itself.
  • Liability Limits. Limited partners' liability for the partnership's debt is limited to the amount of money they invested into the partnership.
  • General partners control daily operations. In a LP, the general partners deal with the daily operations and responsibilities and do not need to consult the limited partners for the vast majority of business decisions.
  • Easy turnover. Limited partners can leave the business or be replaced without dissolving the LP.
  • Investment opportunities. This can be a great way to offer investors the opportunity to benefit from the profits and losses of your business, without involving them in the day-to-day decision making of the business.

Cons:

  • Risks for general partners. In a LP, the general partners carry the burden of all the business' debts and obligations. If the company is sued or enters into bankruptcy, the general partners are liable. Similarly, each general partner has the ability to make decisions on behalf of the company, and those decisions become the responsibility of all the general partners.
  • Compliance problems. Because you have investors (the limited partners), you must hold annual meetings and create a detailed partnership agreement.