Starting a business can be overwhelming. There are many decisions to be made, and potentially expensive risks involved at every stage. However, you can be a part of a business arrangement without carrying all the responsibility (and financial risk) by entering a Limited partnership.
What is a Limited Partnership (LP)?
A Limited Partnership allows a partner to invest in a business without being liable for all the business’s activities. Although they do not have the control that a general partner does, a limited partner can still be a part of the business without the full risk exposure.
Limited Partnership Structure
In order to have a limited partnership, there must be at least one general partner and one limited partner. The general partner has control over day to day business operations, but also has liability for any of the business’s wrongdoings.
Limited partners are more like investors. They have a say in the business, but other partners have to sign off on it first.
Limited Partnership Liability
Limited partners have liability protections. They can only be held liable for the amount that they invested. That’s why there has to be at least one general partner, so someone is held accountable for the bulk of the business’s activities.
Limited Partnership Advantages and Disadvantages
Limited partners enjoy several benefits from their reduced risk exposure:
- No one can come after your personal assets for a business wrongdoing. Your liability is limited to the amount you contributed.
- Limited partners can still get some of the profits without having to take all the risk.
- It’s easier to draw in multiple partners, because they will have liability protection.
However, the benefits are not universal, and both the general partner and limited partners face certain downsides:
- The general partner carries more liability than others, so it might be difficult to find one person to be a general partner from the start.
- There are state filing fees for creating a LP, and they usually have to be renewed annually.
Limited Partnership vs Limited Liability Partnership
While a limited partnership must have at least one general partners, a limited liability partnership (LLP) does not. A limited liability partnership allows a group of limited partners to make all the business decisions while retaining the benefits of limited liability. Furthermore, in a limited liability partnership, partners are not liable for the actions of other partners.
However, some states restrict limited liability partnerships to certain professions, while any business can become a limited partnership.
Limited Partnership vs General Partnership
In a general partnership, there must be at least two general partners that share management responsibilities and are both completely liable for the business. It forms automatically when two people start a business together.
A limited partnership can limit liability for certain partners, but it also requires filing with your state before it can legally form.
Limited Partnership Agreement
In order to form a limited partnership, you’ll need a limited partnership agreement. This is a way of clearly spelling out limited partners’ role in the business, their capital contributions, and how disputes will be settled. Here is a template you can use.
What is a Master Limited Partnership (MLP)?
A master limited partnership is a type of limited partnership that can be traded on a public exchange. In order to receive the tax benefits outlined below, the business must be focused on the exploration, development, or transportation of minerals or natural resources.
Structure of Master Limited Partnerships
Just like other limited partnerships, there are general partners and limited partners. However, there is also usually an agreement that general partners will distribute a percentage of cash flow to the limited partners, and the general partner is entitled to a management fee. This is supposed to incentivize general partners to pursue projects that will produce growth and income.
Advantages of Master Limited Partnerships
The main advantage of master limited corporations is the taxation benefit. Corporations have their income taxed once, pass it on to their members, and then their members are taxed individually as well. With a MLP, partners’ income is only taxed individually. This makes them alluring investment opportunities to partners.
What is a Family Limited Partnership (FLP)?
In a family limited partnership, family members pool money together to start a business. They create shares, and each family member owns a proportion of shares in relation to how much capital they invested. There are still general partners that run the day-to-day operations and usually own a majority of the shares, and there are limited partners within the family as well.
Advantages of Family Limited Partnerships
- Creating an FLP is a great way to generate money and investors that you trust.
- If the company does well, your family does well.
- FLPs allow families to transfer wealth between generations easier. Transfers of shares between partners do not follow the same gift tax regulations as most other forms of wealth. Therefore, it can be a lot cheaper to transfer a lot of money to the next generation.
- FLPs protect your family assets as a whole. Neither creditors nor divorced spouses can come after a limited partner’s shares. A divorced spouse could claim fair market value for the shares he or she was entitled to, but it would be a lower sum than the shares actually represent.
Becoming a limited partners is a great way to support a business venture, family or no, without assuming all the risk and responsibility. This is one of the major selling points for a limited partnership. However, there are several types of business partnerships that you should research if you’re interested in starting your own business. Take the time to consider what would best benefit your interests.
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