Are you a new entrepreneur wondering if a limited partnership is right for your business? It’s a structure where the owners are responsible for the company’s day-to-day operations. The entity must have general and limited partners with different roles.
The general partners manage the business and make crucial decisions to achieve company goals. The limited partners, also called silent partners, are responsible for the business investments instead of operations.
Ready to discover if a limited partnership is right for your business? We’ll discuss the topic more in-depth to help you understand how the partnership works and how to form the entity. Let’s get started.
Understanding how a limited partnership works?
Partnership structure with business entities and personal liabilities are ways this idea works. The details are as follows:
Business entities and personal liability
The extent of personal liability for business debts is a significant concern for entrepreneurs. It comes in various forms, such as lending to finance company operations, tax obligations, and owing employees’ wages.
Other types include lawsuit judgments or buying goods and services without instant payment. But what happens when the debts are enormous, and you can’t remit necessary amounts?
The organization’s assets become the first source for repaying outstanding debts. If the business valuables are insufficient, expect creditors to hold the company owner’s assets legally responsible.
The process known as personal liability means they’ll come for your real estate, bank accounts, investments, vehicles, and other properties.
Hence, creative entrepreneurs want to reduce their liability for company debts. This liability limitation is the primary reason for establishing a corporation, limited partnership, or LLC business.
Getting an in-depth knowledge of general partnerships is crucial to understanding how things work.
This partnership exists when two or more entrepreneurs operate a company as joint owners without establishing an LLC or corporation. With this structure, every member has the right to participate in business operations management. They’re also responsible for the organization’s debts.
Although a limited partnership structure has two or more participants, it has general and limited classes or categories of owners.
General partners participate in every aspect of business operations. They have unlimited personal liability and share responsibilities like other members.
Limited partners have limitations and can’t participate in business operations. So they’re not solely responsible for the company debts in a partnership agreement. They often lose only their investment, unlike general partnerships.
Having general and limited partners are essential for every limited partnership. General partners can create a limited liability company or corporation to reduce their business liabilities. But it makes the company formation process more complex than establishing an LLC or corporation alone.
Advantages of a limited partnership
You can get funding options from investors to your business without seeding control of the company with a limited partnership. It has numerous advantages like other profitable organizations, and they include:
- You can make other entrepreneurs investors in your company by offering them protection from personal liability
- A limited partnership is inexpensive to establish and easier to manage, unlike a corporation or LLC
- General partners can collaborate with investors without ceding business control
- You can have limited partners invest in the business without suffering personal liabilities
- A limited partnership requires less formal structure, reporting and record-keeping
- Limited partners are not liable for self-employment taxes.
Disadvantages of a limited partnership
- Lending capital from financial institutions with a limited partnership can be challenging, unlike an LLC or corporation
- Transferring interests is easier with a corporation and is more accessible than with a limited partnership
- Federal and state securities laws have limitations for limited partners, such as relationships with members and residence
- General partners are responsible for company debts
- Limited partners have minimal contributions to business operations
- Consider these factors before establishing a limited partnership for your business.
How to Form a Limited Partnership
Many US states adopt the Uniform Limited Partnership Act to govern the establishment of limited partnerships by law. Partners must visit the office of the local Secretary of State to register the company in the applicable jurisdiction.
Consider obtaining relevant licenses and permits, which vary based on industry and locality.
Therefore, the state where you’re forming the company has rules dictating the requirements. Generally, these limited partnerships require two documents for creation.
- Limited partnership agreement
- Certificate of limited partnership
Limited partnership agreement: It provides information regarding the agreement between limited and general partners. It also defines business operations and outlines each participant’s rights, expectations, and responsibilities.
Certificate of limited partnership: A registration statement must be filled out with the state agency when registering your company.
Properly evaluating your personal liability concerns is crucial when determining if this method suits your company. Tax considerations, record-keeping, and formation expenses are other factors to consider.
Consider hiring an experienced attorney before initiating the process, as they provide the necessary guidance. They can guide you through the legal process to avoid pitfalls.
Now you understand limited partnerships more in-depth, it’s time to weigh their advantages for your business. Consider your industry, business, tax, and growth methods before deciding.
A limited partnership allows you to add more partners without losing business control. You can also offer them protection from personal liability, which puts your company at a great advantage.
Although limited partnerships require less record-keeping and reporting, learn the rules guiding it from your state. Contact the local Secretary with an experienced attorney to ensure smooth processing.