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A limited partnership, or LP, forms when two or more people own a business. Unlike some other forms of partnerships, however, there are two classes of partners in a limited partnership company:
Limited partnerships were designed to allow people to invest in a business without taking on personal liability to do so. However, general partners do retain personal liability in a limited partnership.
Depending on a business's goals, alternate structures may be better suited. Other business partnership structures include:
Limited partnerships require at least one general partner who remains responsible for the business's day-to-day management. The general partner can be either a person or an entity such as a corporation. General partners make decisions that affect the company, so they are fully liable for any lawsuits or debts that the business takes on.
Limited partnerships must also have at least one limited partner. Limited partners invest in a business to get a share of profits, but they are otherwise passive owners. Liability is limited to the investment they make in the partnership.
Limited partnerships are pass-through business entities for tax purposes. In other words, the business's income tax passes to the individual partners. As with other kinds of partnerships, individuals pay income taxes according to their share of the business, known as a distributive share. The distributive share passes through to the business owner's tax return, and they must pay taxes at their own personal tax rate.
General partners and limited partners are not treated the same way in terms of taxes when the LP has a loss. The general partner may take the loss, even if they do not have other income to offset the loss. On the other hand, because limited partners do not materially participate in running a partnership, their income is considered passive. Therefore, limited partners cannot take a loss to reduce their income taxes if they do not have other income to offset the loss.
Businesses and individuals may have various reasons for forming a limited partnership. The decision comes with both advantages and disadvantages.
Advantages of limited partnerships include:
Disadvantages of limited partnerships include:
People generally choose to form limited partnerships for two main reasons:
It's always a good idea to speak with an accountant and an attorney when setting up a limited partnership to ensure that you're creating the best business structure for your goals. Details of registering an LP vary by state, but most processes include these typical steps:
When creating a limited partnership agreement, it is important to work with an experienced lawyer to ensure the contract contains all necessary components.
ContractsCounsel is not a law firm, and this post should not be considered and does not contain legal advice. To ensure the information and advice in this post are correct, sufficient, and appropriate for your situation, please consult a licensed attorney. Also, using or accessing ContractsCounsel's site does not create an attorney-client relationship between you and ContractsCounsel.
Bobby E. Hill, Jr. is a native of Tuscaloosa, Alabama and holds undergraduate degrees in music and business administration from Xavier University of Louisiana. He received his Juris Doctor from the University of Miami School of Law where he was a staff and articles editor for the school’s Race & Social Justice Law Review and a student attorney in the institution’s Immigration Clinic. In addition to freelancing, Bobby is currently a litigation associate at Johnson & Freeman, LLC, a boutique litigation firm in Atlanta, Georgia, where he practices in the firm's Condemnation, Probate, Real Estate Litigation, Real Estate Transactions, E-Discovery and Business and General Civil Litigation Practice areas. In this role, Bobby has acquired appreciable experience in drafting memoranda of law for partners and senior counsel, and all litigation related pleadings including pleadings related to dispositive motions, discovery, appeals, and other post-judgment relief.
Dual Qualified New York Attorney & Enrolled NZ Barrister & Solicitor
I am a corporate attorney with offices in Rock Hill, SC, and Lavonia, GA. My practice is focused on contracts, tax, and asset protection planning. I act as a fractional outside general counsel to over 20 businesses in 6 countries. When not practicing law, I can usually be found training my bird dogs.
I am a solo-practitioner with a practice mostly consisting of serving as a fractional general counsel to start ups and growth stage companies. With a practical business background, I aim to bring real-world, economically driven solutions to my client's legal problems and pride myself on efficient yet effective work.
I graduated from the University of Illinois at Urbana-Champaign in 2006 with a degree in Political Science, Finance, and Economics. I stayed around Champaign for law school and graduated in 2009. I then worked at a big law firm in downtown Chicago. It was boring, so I quit in early 2011. I thought that I could not be happy practicing law - I was wrong. After I quit the traditional law firm life, I began representing my own clients. I realize now that I love helping normal people, small business owners, and non-profits address a variety of legal issues. I hope to hear from you.
My clients know me as more than just an attorney. First and foremost, my background is much broader than that. Prior to attending the Valparaiso University School of Law, I earned a Master of Business Administration and ran a small business as a certified public accountant. Thanks to this experience, I possess unique insight which in turn allows me to better assist my clients with a wide range of business and tax matters today. In total, I have over 20 years of experience in financial management, tax law, and business consulting, and I’m proud to say that I’m utilizing the knowledge I’ve gained to assist the community of Round Rock in a variety of ways. In my current practice, I provide counsel to small to medium-sized businesses, nonprofit organizations, and everyday individuals. Though my primary areas of practice are estate planning, elder law, business consulting, and tax planning, I pride myself on assisting my clients in a comprehensive manner. Whenever I take on a new client, I make an effort to get to know them on a personal level. This, of course, begins with listening. It is important that I fully understand their vision so I can help them successfully translate it into a concrete plan of action that meets their goals and expectations. I appreciate the individual attributes of each client and know firsthand that thoughtful, creative, and customized planning can maximize both financial security and personal happiness. During my time as a certified public accountant, I cultivated an invaluable skill set. After all, while my legal education has given me a deep understanding of tax law, I would not be the tax attorney I am today without my background in accounting. Due to my far-reaching experience, I am competent in unraveling even the most complex tax mysteries and disputes. My CPA training benefits my estate planning practice, too. In the process of drafting comprehensive wills and trusts, I carefully account for every asset and plan for any tax burdens that may arise, often facilitating a much smoother inheritance for the heirs of my clients. Prior to becoming certified as a CPA, I made sure to establish a solid foundation in business both in and out of the classroom, and the acumen I’ve attained has served me well. Not only am I better able to run my own practice than I otherwise would be; I am able to help other small business owners fulfill their dreams, as well.
