The Limited Partnership
The General Partnership is a type of business organization in which two or more individuals or entities, called general partners, manage the business and are equally liable for its debts. Nowadays, with the institution and existence of so many business entities, the general partnership is less used in business formation. While in some circumstances, the general partnership could be great for your business – we also will explore the limited partnership and all of its extended benefits.
A limited partnership is a form of partnership similar to a general partnership, except that in addition to one or more general partners (GPs), there are one or more limited partners (LPs). Also to note, the limited liability partnership is an entity that is comprised of licensed professionals such as Attorneys, accountants and architects.
The General Partnership: Advantages and Disadvantages
- Partnerships don't require a filing to the state, whereas a limited partnership and family limited partnership do.
- There are no meeting requirements and very few formalities.
- Taxation is generally favorable – and you are only taxed once (no double taxation).
- General partners have unlimited personal liability for debts, losses and other liabilities.
- Every partner shares in the responsibilities. So if one partner does something bad within the scope of business, every partner is responsible for his or her actions (therefore, it is very wise to choose responsible co-partners)!
- Poorly organized partnerships with poor partnership agreements can, and inevitably do in most cases, lead to disputes among owners.
The Limited Partnership
A limited partnership is comprised of one or more general partners and one or more limited partners. Limited partnerships must file their existence with the state in which they incorporate.
General Partner Status
General Partners have the ability to manage or control the partnership business, share in the partnership property, share in partnership profits and share in liability for the debts of the partnership jointly.
It is very important to choose the right general partners and have proper partnership agreements in place to fully protect present and future interests. There must be at least one general partner in a partnership, however the general partner can also be the limited partner as long as there are other partners. General partners have the authority to bind the partnership legally and financially.
Limited Partner Status
Limited Partners have limited liability, like shareholders in a corporation. That means that limited partners are only responsible for as much as they invest. They are not liable for the full debts of the partnership nor can they lose more than they put in. This is ideal for someone who is essentially just interested in being an investor in a business and has no interest in running that business.
However, if the limited partners fall out of their role of not retaining control over the business – (by making partnership decisions) then their limited liability may be stripped away (alter ego theory).
Therefore, it is crucial to understand your limited role as a limited partner in a partnership and not to go beyond that role. Limited partners must also disclose their limited partner status when dealing with other parties. Limited partners do not have inherent agency to bind the partnership and this should be communicated to anyone who may think otherwise. Finally, limited partners are paid a return on their investment – which is outlined by the partnership agreement.
Formation of the Limited Partnership
Unlike the general partnership, the limited partnership does follow the formalities of filing a certificate of limited partnership or certificate of organization or registration statement with the state, which then issues a charter acknowledging the limited partnership's formal existence. Most state filings include:
- A name for your limited partnership.
- An address.
- Name and address of the general partners.
- Name and address of the resident agent.
- General activities or purpose of the limited partnership (in some states a statement of 'any lawful business which may be conducted by a limited partnership' will suffice).
- Mandatory dissolution date.
The partnership certificate only establishes your existence to the public – without a partnership agreement your partnership can be run any which way a general partner pleases. Therefore, partnerships based on oral agreements are sure to go awry very quickly. A partnership agreement that memorializes every nook and cranny of your partnership goals and aspirations, including management and returns, should be the fundamental building block of your new business.
The partnership agreement should dictate every aspect of your new business including management, what happens when a member withdraws, who can buy partnership interests, how decisions will be made, how the ownership interest will be shared, etc. The partnership agreement is unique to every business and should be updated and amended as your business grows, decreases in size or changes in any way. Being as thorough as possible with this agreement will curb many issues and confusions later on.
If you have any questions on creating a partnership agreement, please contact us for a complimentary preliminary consultation.
Withdrawing Partners and Dissolution
Dissolution is namely based on contract law principles and what your partnership agreement says. It can be as easy as signing on a dotted line or as difficult (if you have a shoddy partnership agreement or a very complicated partnership) as litigating for partnership rights.
This all depends on your specific set of facts: what side of the equation you are on, your personal and financial interests, how many partners you have, how willing they are in leaving or ending the partnership, etc.
Contact a licensed attorney if you have any questions regarding withdrawing from your partnership, or asking a partner to withdraw their interest or closing your partnership completely.
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