Limited Partnership Definition
Learn more about what a limited partnership is and why it may be right for you.
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Do you and a partner or two have a business idea that you’d like to try out? If so, you’ve probably considered which business entity is best for you. During your research, did a business partnership come up?
In business, there are three types of partnerships: a general partnership (GP), a limited partnership (LP), and a limited liability partnership (LLP). Of these three, we’ll be going over the limited partnership.
Limited Partnership Definition
A limited partnership is made up of at least two people. One is the general partner and this person oversees business operations. The others are known as limited partners and their responsibilities don’t involve the business’s management.
The general partner also holds unlimited liability for the business’s debt and the other partners only hold liability equal to their investment in the company. In most states, limited partnerships are governed at the state level, meaning you might have to file with the Secretary of State to officially establish the business.
Limited Partnership Benefits
All business entities have their benefits, and the limited partnership is no different. Here are a few:
Easy Formation
Limited partnerships are known for their easy formation process. They also aren’t required to have annual meetings or record minutes.
Liability Protection
As we mentioned before, the limited partners have personal liability protection if the business has to deal with debts or legal issues.
The General Partner’s Control
The general partner has full control over how the business is run. This can be a plus if this person is the only one of all the partners with business experience.
Pass-Through Taxation
Limited partnerships are granted “pass-through” taxation, meaning they don’t pay income taxes. Instead, the business’s profits and losses are passed through to the general and limited partner(s) who report their share of these on their tax return. The limited partners also aren’t required to pay self-employment taxes.
Limited Partnership Considerations
You’ll have to carefully consider if a limited partnership is the best entity for your business idea. Keep the following in mind:
- To form a limited partnership, you’ll have to do so in your home state.
- As we mentioned earlier, most states require filing with the Secretary of State.
- You should draft a Limited Liability Agreement to lay out how the business will be operated and to detail each partner’s responsibilities.
- Depending on your industry, you may need to apply for specific business licenses and permits. Be sure to do some research to find out what you’ll need. Remember that these licenses and permits may also vary depending on your location.
Although these are just a few considerations, they’re the ones most partners should remember when creating their company.
Other Names for a Limited Partnership
Other than simply being called an LP, a limited partnership really has no other names its known by.
Limited Partnership Examples
The limited partnership entity may work better for certain industries than others. For example, family businesses, real estate investors, and even the entertainment industry use the limited partnership model when one person is best for running the business while the other partners invest in it.
Summary
A limited partnership offers plenty of advantages, like control of the business for the general partner and limited liability for the other partners. It’s also one of the easiest entities to form.
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Disclaimer: The content on this page is for informational purposes only, and does not constitute legal, tax, or accounting advice. If you have specific questions about any of these topics, seek the counsel of a licensed professional.
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