Limited Partnership LP

An important decision to be made when starting a new business is which type of business structure to adopt. The business structure determines the method of ownership, management, transferability and taxation of the enterprise. Even more important, the personal liability of owners for the debts and obligations of the business is controlled by the type of business structure they choose.

For instance, a general partnership is a popular choice of business structure, but one drawback of the general partnership is that creditors of the business may look to the personal assets of the individual partners to satisfy the claims. A Limited Partnership (LP) might be the solution for owners concerned about personal liability.

Overview

A partnership is created when two or more people agree to operate a business for profit. A limited partnership has at least one general partner and one limited partner. A limited partnership is a business structure that must be authorized by state law.

Formation

Because it is a creation of state law, the rules for formation of a limited partnership may differ from state to state. Generally, a limited partnership is formed by filing a limited partnership agreement with the state agency that oversees business entities. This is usually the secretary of state or the department of state.

Management Roles

The general partner in a limited partnership handles the management and operations of the business. The limited partner cannot participate in the management or decision-making processes of the business. If a limited partner participates in running the business, the business will lose its status as a limited partnership. Unlike a general partner, a limited partner cannot enter into agreements with third parties on behalf of the limited partnership or the other partners.

Personal Liability

General partners are personally liable for the debts and other financial obligations of the business. A creditor of the limited partnership may look to the personal assets of the general partners to satisfy business claims. A limited partner cannot be held personally liable for business obligations. The money the limited partner invests in the limited partnership is the only thing a limited partner risks in the event the business fails.

Taxation

A partnership is not considered to be a taxable entity by the Internal Revenue Service. The income and losses of a partnership are passed through to the general and limited partners in equal shares unless the partners agreed in writing to share them differently. The tax on the income is paid by each partner on that partner’s personal income tax return.

Death of a Limited Partner

A limited partnership will continue to operate after the death of one or all of the limited partners. If there are surviving limited partners, the business continues as a general partnership. If a general partner dies, the limited partnership can continue to operate as long as there is another general partner. A limited partnership ceases to exist if the sole general partner dies. The reason for this is that limited partnerships must have at least one general partner.