What is a Limited Partnership (LP)?
A limited partnership has at least one general partner and one limited partner. The general partner has the same role as in a general partnership: controlling the company’s day-to-day operations and being personally liable for business debts.
Limited partners do not play an active role in the business. The limited partners (most LPs have more than one limited partner) contribute financially to the business but have very little control over business decisions or operations. They normally cannot bind the partnership to business deals.
Limited partners are not personally liable. In return for giving up management power, limited partners get the benefit of protection from personal liability. This also means that a limited partner can’t be forced to pay off business debts or claims with personal assets. A limited partner, however, can lose his or her financial investment in the business.
Limited partners face slightly different tax rules. For income tax purposes, limited partnerships generally are treated like general partnerships, with all partners individually reporting and paying taxes on their share of the profits each year. Limited partners, as a rule, do not have to pay self-employment taxes; because they are not active in the business, their share of partnership income is not considered “earned income” for purposes of the self-employment tax.
Limited partners need to understand that they can become personally liable if they do not stick to their passive role. Also, if a limited partner starts taking an active role in the business, that partner’s liability can become unlimited. If a creditor proves that a limited partner took acts that led the creditor to believe that he or she was a general partner, that partner can be held fully and personally responsible for the creditor’s claims.
What are the advantages of a Limited Partnership (LP)?
Advantages of a limited partnership include:
Protection of personal asset : The limited partnership structure offers liability protection up to the amount of the investment for the company’s limited partners.
Pass-through taxation: A limited partnership’s income is not taxed at the business level; instead, business profit and loss are “passed through” to the partners for reporting on their personal tax returns.
Full oversight: The general partner has complete management control of the limited partnership.
Investment potential: Limited partnerships can make capital investments by adding more limited partners.