An Overview of Limited Partnerships – The More Complex Older Brother Of the LLC

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There are, generally, two types of partnerships: General Partnerships and Limited Partnerships. General partnerships are contractual arrangements that are not filed with the state and consist of one or more partners that share all of the liabilities and obligations of the general partnership. There are few instances where a general partnership (also sometimes referred to as joint ventures) makes the sense as a structure and I would strongly advise consulting with a transactional attorney before entering into a general partnership. A limited partnership is filed with a secretary of state in its state of formation and includes one or more general partners and one or more limited partners. Limited partnerships are prevalent in both the real estate and oil and gas industries and are good vehicles for certain business operations; however in order to operate them correctly, the complexities of the limited partnership need to be understood and observed. Some of the general characteristics of a limited partnership are as follows:

  • Formation document: certificate of limited partnership filed with the secretary of state of formation.

  • Governing document: limited partnership agreement.

  • Management is initially vested in the general partner(s). The general partner(s) may delegate management and may (but need not) designate officers to manage day-to-day operations of the limited partnership. The general partner incurs all of the liabilities and obligations of the limited partnership, whereas the limited partners enjoy limited liability (assuming they stay within certain parameters).

  • Though the general partner has general authority, certain major decisions typically have to be approved by the limited partners and the powers of the general partner can be limited as appropriate by the limited partners in the limited partnership agreement.

  • Limited partners must be careful not to participate in management in such capacity or they risk losing the benefit of their limited liability.

  • Two general classes of partners:

    • A general partner (generally responsible for management and has all of the liability responsibility for the entity)

    • A limited partner (typically a silent investor)

  • At least one general partner is always required to form a limited partnership.

  • Distributions from the limited partnership do not need to be proportionate to ownership – the limited partnership agreement provides owners with great flexibility to apportion the economics of the entity.

A limited partnership will most likely elect to be treated by the IRS as a "pass-through" entity for tax purposes, which means it does not pay an entity level tax. Instead, the profits and losses of the limited partnership pass-through to its partners who then include their respective share of those items on their individual income tax returns.

Limited partnerships are good vehicles for more complicated entity structures and provide many benefits to business owners, including limited liability and flexibility for allocating the economics among owners (including potential investors). However, a limited partnership structure is complex and will require more attention than some other entities, meaning it could cost more (in legal and accounting fees) to operate correctly. Before making a decision to form a limited partnership as an entity for a business, the founders of a business should consult with both legal and tax professionals to ensure that a limited partnership is the correct vehicle for the proposed business.

Check out our related blog posts:

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The Limited Liability Company – An Overview: You Should Probably Use An LLC For Your Business

For more information on this topic, please visit our Business Entity Formation service page, which is part of our Corporate and Commercial practice.

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