Overview of the Fundamentals of a Limited Family Partnership
A limited partnership has one or more general partners, and one or more limited partners. The limited partnership's general partner(s) have the same rights and liabilities as partners in a general partnership – namely the right to manage the partnership. They also have unlimited personal liability for partnership debts. Limited partners, on the other hand, have no managerial authority. Their personal liability is limited to their investment in the partnership. They are insulated from partnership debts in the same way corporate stockholders are from corporate debts. But corporate stockholders can lose their corporate shares to their personal creditors. Partners in a limited partnership cannot lose their limited partnership interest to their personal creditors. This is the major difference.
General and limited partners in a limited partnership contribute money, assets or services for their partnership interest. The general partner has the complete authority to manage the limited partnership.
Since the general partner can incur liability for partnership debts, the general partner should be a corporation or LLC so creditors of the limited partnership can only pursue the assets of that corporation or LLC as the general partner. The assets of the general partners, stockholders or members would remain safe. The corporation or LLC, which owns only a nominal interest in the limited partnership would then have only modest exposure. We can protect the few assets owned by the corporation or LLC through other asset protection strategies.
Limited partnerships operate similarly to general partnerships. Limited partners contribute cash or other assets to the partnership and receive distributions based on their partnership interest. Limited partners do not directly control the partnership or its assets. Historically, limited partners were silent partners. They did not want their identity revealed and did not want to run the company. They simply wished to passively invest in the business and receive a profit. Limited partnerships today seldom involve anonymity (although anonymity may still be a desirable feature).
A limited partner cannot manage or give orders or directives to the general partner, but can provide advisory opinions. A limited partner's name should not be part of the partnership name, nor should a limited partner create the inference that the limited partner manages the business. If a general partner is also a limited partner, that individual would have unlimited liability as a general partner.
Limited partners have the right to review partnership's financial and legal records (as corporate shareholders can inspect corporate records) as well as the names of other partners, their addresses, contributions, shares in profits and losses, partnership tax returns and access to business records not considered proprietary.
General partners must also give the limited partners the tax information needed to complete their federal and state income tax returns. Unless the partnership agreement says otherwise, limited partners cannot be required to add more capital to the limited partnership. Nor may one limited partner have rights over any other limited partner. The limited partners voting rights are specified in the partnership agreement and the Uniform Limited Partnership Act (ULPA).
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