Limited Partnership

A Limited Partnership is a business structure that combines features of a limited company with that of a partnership for use as a tax shelter, but does not create a legal entity separate and distinct from its owners. It is usually formed by at least one general partner (or full partner) and at least one limited partner (or nominal partner).

limited partners contribute capital and share in the profits while one or more general partners operates the business. General partners remain personally liable for partnership debts and risks while limited partners incur no liability with respect to partnership obligations beyond their capital.

Example

Jenny, Brian and Will are partners in owning and running a restaurant called The Brick Oven. Per their partnership agreement, Jenny and Brian are limited partners. They invested in the restaurant by giving $120,000 each. Will is a food services expert, so he runs the store. Will is a general partner. Note that all the partners will be considered general partners unless there’s a written agreement between the partners stating otherwise.

Advantages

  • a Limited Partnership makes it less difficult to attract investors because limited partners have limited liability to the business debts.
  • Profits and losses pass through the business to the partners, who end up being taxed on their own personal income tax returns.
  • Being a limited partner puts a limitation on liability with respect both to potential lawsuits and money; the limited partner is only going to be liable for the amount of capital it contributed to the business; a business creditor cannot come after the limited partner’s personal assets.
  • Limited partners get to share in the profits and losses without having to participate in the business itself.

Disadvantages

  • If the limited partner becomes active in the business he or she may have general-partner personal liability.
  • General partner is personally fully liable for the debts of the business.
  • Certificate of Limited Partnership must be filed with the state before the partnership comes into existence, which includes state filing fees.

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