Limited partnerships are organized to move the joint and several liability from investors (limited partners) to the manager of the partnership, the general partner. In modern business, the traditional partnership is fraught with legal risk. Learn how to organize and manage limited partnerships.
A limited partnership1 must have at least one general partner and one limited partner. The general partner manages the partnership and assumes personal liability for the obligations of the partnership. The limited partner is passive in management and assumes limited personal liability.
Limited partnerships were popular in real estate intensive businesses in the 1980's. LPs provided highly tax efficient investment for limited partners.4
LPs are typically designed to provide passive income to investors. They are not used for actively managed businesses.
After you form a limited partnership, you must maintain it to keep it in compliance. Track the following information for a limited partnership:
This table summarizes the types of partnership documents and filings:
|Organizational filings||at formation||No|
|Partnership agreement||at formation||No|
|Partnership tax returns||ongoing||No|
|Capital account||at formation||No|
Management and ownership structures depend on the partnership agreement, type of partnership, and state law.
The general partner provides the governance and management function. Limited partners might, however, have some voting voting rights. Alternatively, partnership agreement might spell out a separate governance function.
People often serve more than one role so it is important to list roles and who serves those roles. In the long run, it is also helpful to track terms of service for each role and person.
Here is the information to track for officers and directors:
Please note that a person can have two different roles with very different terms of service.
The managing partner is called the "General Partner". Owners who are not the general partner are "Limited Partners". Ownership interests are called "partnership interests".
You should capture the name of the owner and the percentage of ownership at a minimum.
To preserve the benefits of your legal entity, effective ongoing maintenance is critical.