Limited Partnership Registration
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A limited partnership exists when two or more partners unite to conduct a business in which one or more of the partners is liable only to the extent of the amount of money that partner has invested. Limited partners do not receive dividends but enjoy direct access to the flow of income and expenses. The main advantage of this structure is the owners are typically not liable for the company’s debts.
A limited partnership has at least one general partner and at least one limited partner. The general partner has the same role as in a general partnership: controlling the company’s day-to-day operations and being personally liable for business debts.
The role of limited partners, however, differs in a few ways:
- Limited partners do not play an active role in the business. The limited partners (most LPs have more than one limited partner) contribute financially to the business (for example, a limited partner might invest $100,000 in a real estate partnership) but have minimal control over business decisions or operations, and normally cannot bind the partnership to business deals.
- Limited partners are not personally liable. In return for giving up management power, limited partners get the benefit of protection from personal liability. This means that a limited partner can’t be forced to pay off business debts or claims with personal assets. A limited partner, however, can lose his or her financial investment in the business.
- Limited partners face slightly different tax rules. For income tax purposes, limited partnerships generally are treated like general partnerships, with all partners individually reporting and paying taxes on their share of the profits each year. Limited partners, as a rule, do not have to pay self-employment taxes; because they are not active in the business, their share of partnership income is not considered “earned income” for purposes of the self-employment tax.
- Limited partners need to understand that they can become personally liable if they do not stick to their passive role. If a limited partner starts taking an active role in the business, that partner’s liability can become unlimited. If a creditor can prove that a limited partner took acts that led the creditor to believe that he or she was a general partner, that partner can be held fully and personally liable for the creditor’s claims.
Formation of Limited Partnership
Almost all U.S. states govern the formation of limited partnerships under the Uniform Limited Partnership Act, which was originally introduced in 1916 and has since been amended multiple times. The most recent revision was in 2001. The majority of the U.S. – 49 states and the District of Columbia – have adopted these provisions.
To form a limited partnership, the partners must register the venture in the applicable state, typically through the office of the local Secretary of State. It is important to obtain all relevant business permits and licenses, which vary based on locality, state or industry.
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