A Limited Partnership (LP) is a business structure that has at least one General Partner (GP) and one or more Limited Partners (LPs). It combines the flexibility of partnerships and corporations, with liability protection for limited partners. Limited partnerships are used in industries such as real estate, investment, and entertainment.
Content Outline
Key Takeaways for Limited Partnership
Dual Roles
A Limited Partnership has General Partners who manage the business and have unlimited liability and Limited Partners who invest capital and have limited liability.
Limited Liability
Limited Partners are only liable for the amount of capital they have invested in the partnership, their personal assets are protected from the partnership’s debts.
Taxation
Like other partnerships, Limited Partnerships have pass-through taxation where profits and losses are passed through to the partners and reported on their personal tax returns.
Management Structure
General Partners have full control of the management of the partnership, and Limited Partners have no management authority and are passive investors.
Limited Partnership Taxation
Limited Partnerships have pass-through taxation, the partnership does not pay income tax. Instead, profits and losses are passed through to the partners based on their ownership. Each partner reports their share of income, deductions, credits and other tax items on their personal tax returns. The partnership issues a Schedule K-1 form annually to each partner showing their share of the partnership’s income and expenses.
Advantages Of A Limited Partnership
- Limited Liability for Investors: Limited Partners have limited liability, they can only lose the amount of capital they invested in the partnership.
- Flexible Ownership: Limited Partnerships allow for flexible ownership structures, perfect for investment purposes where passive investors don’t want management responsibilities.
- Pass-Through Taxation: No double taxation, income is taxed only at the partner level not at the partnership level.
- Easier to Raise Capital: The structure of a Limited Partnership makes it easier to attract investors, they can invest without management responsibilities or personal liability.
Disadvantages Of A Limited Partnership
- Unlimited Liability for General Partners: General Partners are personally liable for all the partnership’s debts and obligations, their personal assets are at risk.
- Limited Control for Limited Partners: Limited Partners have no say in the day-to-day management of the partnership, which can be a minus for those who want to be more involved.
- Complex Formation and Regulation: Setting up a Limited Partnership is more complex and costly than other business structures, and requires formal agreements and state-specific regulations.
- Conflicts: Disputes can arise between General and Limited Partners, especially if there are disagreements on management decisions or profit distribution.