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A Limited Partnership is similar to a General Partnership in almost every way, except that it is slightly more complex because it offers certain enhancements, including a framework that distinguishes the varying degrees of liability between what is known as a General Partner and a Limited Partner. A General Partner is characterized as one of the primary owners of the company, responsible for participating in management decisions as well as all legal and financial obligations of the company. However, a Limited Partner has a much more narrowly defined role within the structure of the company. A Limited Partner is typically an investor who has provided capital in exchange for a shared interest in the business. Since Limited Partners are prevented from participating in business-related decisions, they are provided a certain amount of protection from the financial and/or legal obligations of the company. By creating this distinction, a Limited Partnership begins to take on the hybrid characteristics of both a General Partnership and a Corporation by maintaining the relatively simple business structure afforded to Partners and the limited liability afforded to Corporate Shareholders.
Advantages of a Limited Partnership
- Unlimited Shareholders
- Certain Tax Advantages
- Utilization of Financial/Managerial Strengths of Partners
- Unlimited Cap on Capital Acquisition with Partnership Agreement
- Liability Protection for Limited Partners
Despite the lack of a formal corporate structure, there are certain advantages that a Limited Partnership has over a Corporation, including an allowance for an unlimited number of shareholders. There are also several tax advantages associated with a Limited Partnership. However, with the introduction of the Sub Chapter S Corporation, many of those tax breaks were eliminated, and today the benefits of a Corporation greatly outweigh those of the Limited Partnership. Another advantage of a General Partnership is that it provides a template which allows for the financial contributions of one partner to be balanced by the managerial strengths of another partner. For example, in many General Partnerships one or more of the partners is solely involved due to his contribution of capital resources while the others are more intimately involved in the day-to-day decision-making related to the business operation itself. In addition, with a properly structured Partnership Agreement, there is no cap on the amount of capital that the General Partners can garner from the business. However, arguably the most significant advantage of a Limited Partnership is the limited liability that is afforded to the Limited Partners. For example, if a business organized as a Limited Partnership is sued and a judgment is issued, the personal assets of the Limited Partners are protected from seizure. Because of this protection, a Limited Partnership is often used effectively to shield the assets of Limited Partners from creditors.
Disadvantages of a Limited Partnership
- Extensive Documentation Required
- Lack of Legal Distinction for General Partners
- General Partners’ Personal Assets Unprotected
- General Partners Liable for Each Others’ Actions
- Less Protection from Excessive Taxation
- Partnership Terminated Upon Death or Withdrawal of One of the Partners
- More Advantages by forming a Limited Liability Company
One of the disadvantages of a Limited Partnership is the extensive paperwork required upfront. The required documents also vary from state to state. However, the most significant disadvantage of a Limited Partnership is directly related to the lack of legal distinction between the General Partners and the business itself. General Partners continue to be personally accountable for any litigation against the business as well as any negative consequences of the actions of the other General Partners. A General Partnership also has far less protection from excessive taxes and virtually no guarantee of perpetuity.
With the rise of the Limited Liability Company (LLC), fewer businesses are choosing to organize as a Limited Partnership. Even though both LLCs and Limited Partnerships are similar in their Partnership-style taxation and management requirements, an LLC offers greater liability protection for all its members.
Recommendations for a Limited Partnership
Because of the liability protection a Limited Partnership affords to its Limited Partners, it is an ideal organizational structure for businesses that utilize a “labor-capital” partnership where certain partners contribute money and others perform the actual work. It is also common to single or limited-term project-related businesses, such as the real estate and film industries.
Formation of a Limited Partnership
Usually there are state filing requirements in order to establish a Limited Partnership. However, in some states, including California, a Limited Partnership can be established by oral agreement. Of course, it is much smarter to establish a written Limited Partnership Agreement in order to avoid any potential disputes and define any liability protection afforded to Limited Partners. Because of the complexities of Limited Partnerships, it is wise to solicit professional assistance when considering forming one.