What is a limited partnership?
ComplianceApril 09, 2015

What is a Limited Partnership?

A limited partnership is a form of business organization that provides a great deal of flexibility in management and the division of profits, but that requires at least one partner have unlimited personal liability for the business debts.

If your business has more than one owner, you are operating as a general partnership until you affirmatively adopt a different business structure. You and the other owners share the management of the company. Each owner is personally liable for all the partnership’s debts and liabilities. Ideally, every business operated as a partnership will have a written agreement that spells out how the business is managed, how profits and losses are divided, how new owners are brought in, how individual owners withdraw and how the business terminates.

In a general partnership, every partner’s personal assets are at risk. A creditor can pursue only one partner, requiring the partner to attempt to get reimbursement from the other partners.  This unlimited personal liability can deter investment in the partnership, making it hard to raise capital to sustain and grow the business. One solution is to move from a general partnership to a limited partnership.

In a limited partnership, there are two types of partners: general and limited.

  • General partners are personally involved in running the business—and they’re personally liable for all of its debts.
  • Limited partners are like corporate shareholders. They are not (and can not) be personally involved in day-to-day operations. In exchange for contributions of cash, they receive a limited partnership interest that lets them share in the profits (and losses to the extent of their contribution.)  They aren’t personally liable for the business debts. The most limited partners can lose is what they paid for their partnership interests.

Forming a Limited Partnership

A general partnership comes into being whenever a business is operated by more than one owner. However, a limited partnership—like a corporation or a limited liability company—comes into being only after a Certificate of Limited Partnership is filed and approved by the state.

Expect to provide the following information when you apply for a certificate of limited partnership:

  • Name of partnership
  • The business address of partnership
  • Registered agent’s name and address
  • Partnership’s purpose
  • General partners names

Some states also require that the limited partnership agreement be filed with the state. This agreement spells out:

  • The amount and timing of each partners contributions
  • Who will manage the partnership and how it will be managed
  • The responsibilities of each general partner
  • How profits and losses will be allocated to the partners
  • When cash or property will be distributed to the partners
  • The impact of a partner’s death or withdrawal from the partnership

A limited partnership is generally not the best choice for operating a business because at least one partner has unlimited exposure for the liabilities of the business. However, it can be combined with other business structures in a variety of ways that lessen this risk. You should work closely with an attorney if you are considering operating as a limited partnership.

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