Business Structure: Limited Partnership (LP)

  Introduction

A limited partnership (LP) is a business entity created under state law that consists of both general partners and limited partners. General partners manage and run the partnership and are personally liable for its debts and obligations and therefore a separate company with limited liability protection typically needs to be formed to protect the general partners. Limited partners contribute capital to the partnership but unlike general partners, typically do not participate in the management of the business. Personal liability for limited partners is limited to the amount of capital that they invest in the business.

To form a LP, the partners are required to file a formation certificate with their appropriate state agency and pay a filing fee

  Advantages

  • Allows capital to be raised and used in a flexible manner
  • No extra tax filing requirement, as profits or losses can be reported on the owner’s tax return (pass through taxation)
  • Allows the separation of management and ownership

  Disadvantages

  • An individual acting as general partner assumes personal liability for business debts and liabilities unless the partner forms an LLC, corporation or other separate company with limited liability protection which can be cumbersome for a start-up business
  • More expensive to form than sole proprietorships or general partnerships
  • Limited partners are unable to participate in managing the business so are at the mercy of the general partners
  • LP formalities must be followed or face the risk of losing liability protection

 

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