Limited Partnership Defined: How to Form a Limited Partnership

A limited partnership is a type of business arrangement wherein a general partner manages and takes on legal responsibility for the partnership’s debts and financial obligations, while limited partners contribute funds without managerial involvement.

These limited partners are legally liable only up to the amount of money they contribute to the business, whereas the general partner must cover all additional expenses in the event of a person or entity suing the limited partnership or a creditor calling in debt.

Limited partnerships are especially common in real estate and for small businesses. For example, in a family business, one family member might act as the primary small business owner and general partner. Additional family members could contribute funds to the venture without as much legal exposure.

According to the Uniform Limited Partnership Act, you and your partners must request to form a limited partnership with your Secretary of State to remain in accordance with both federal and state law. Specific rules for limited partnerships might differ from one jurisdiction to the next.

With a limited partnership, you must also provide a partnership agreement that outlines the responsibilities and contributions of each individual partner.

Limited partnerships come with various benefits for those who form them. Here are three to consider:

1. 1. Decreased tax burden: When you and your other partners form a limited partnership, you eliminate the need to pay self-employment taxes. Additionally, given that limited partnerships are pass-through business entities, the Internal Revenue Service (IRS) also expects each partner to contribute income tax through personal tax returns. This allows everyone involved to avoid double taxation (i.e., paying both personal and corporate income tax).
2. 2. Increased influence for general partners: Business decisions fall on the shoulders of general partners exclusively in nearly all limited partnerships. This business arrangement prevents limited partners from making managerial decisions, leading to general partners having far more sway over the company’s day-to-day activities.
3. 3. Less liability for limited partners: As a limited partner, you still get to share in business profits while also receiving limited personal liability protection. This means your personal assets will remain protected in the event of a lawsuit or creditors calling in debt payments. You’re only liable for the amount of money you personally contribute to the organization.

Limited partnerships come with some downsides, as is the case for any business arrangement. Keep these three in mind:

1. 1. Increased liability for general partners: General partners might have near total influence over a company’s management in this arrangement, but this comes at the cost of bearing the brunt of responsibility for all business debts and legal expenses. This can prove a high price to pay in the event of a bankruptcy or lawsuit.
2. 2. Less influence from limited partners: When it comes to daily business operations, limited partners are silent partners. They might make fiduciary contributions to the company, but they have little say in how the general partner actually runs it.
3. 3. Reduced flexibility for all partners: Business law is quite rigid when it comes to how limited partnerships can legally operate. You’ll be unable to transition roles easily in this arrangement—for instance, it’s difficult for a limited partner to take over any aspects of daily management legally.

A partnership can take the form of many different business arrangements. Here are a few types of partnerships to think about for your own company:

• General partnerships: In the early stages of business formation, ask each partner how much management control they want. If everyone hopes for an equal share, a general partnership may be the way to go. This greater amount of influence comes at the cost of greater liability to cover company debt and legal expenses for all partners in this arrangement.
• Joint ventures: This type of business partnership refers to two or more partners sharing management of the business venture they work on together for a limited time only. These are traditionally general rather than limited partnerships, albeit with an expiration date. Joint ventures are ideal for short-term working arrangements.
• Limited liability partnership (LLP): In this form of business structure, all partners have reduced legal liability and similar management responsibilities. A limited liability partnership (LLP) differs from a limited liability company (LLC)—the former provides liability protection with exceptions for each partner’s individual negligence, whereas the latter offers unlimited personal liability for privately held assets.
• Limited partnership: In a limited partnership (LP), a general partner runs the business and assumes full liability for its conduct. Limited partners join primarily as investors. An LP’s day-to-day business operations differ from LLPs, LLCs, or corporations. It is structured more like a sole proprietorship with the addition of minority owners. Limited partnerships do not provide liability protection across the ownership group. The general partners bear unlimited liability for any misdeeds of the business.

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