What is a limited partnership (LP)?

 

Limited partnership is a form of partnership in which all the “limited partners” of the business have limited liability for business debts and liabilities of the partnership business. In a limited partnership (LPs), at least one of the owners is considered a "general" partner who makes business decisions and is personally liable for business debts. LPs have one or more "limited" partner(s) that invest money in the business but have minimal control over daily business decisions and operations of the partnership. Similar to shareholders of corporation or members of an LLC, the limited partners have the benefit of limited liability.

 

How are limited partnerships taxed?

 

Similar to a general partnership, limited partnerships “pass through” their profit to the partners who pay taxes on such amounts on their personal tax returns.

 

Limited partners typically do not have to pay self-employment taxes. Since limited partners do not actively participate in the day to day management of the limited partnership, as the case may be, their share of partnership income is not considered "earned income" for purposes of the self-employment tax. In this regard, it is important to note that limited partners can become personally liable (and lose the limited liability afforded by the limited partnership) if they do not stick to their passive role. Some states have enacted certain exceptions to this "active role in the business" rule. These exceptions usually allow a limited partner to vote on issues that affect the basic structure of the partnership, including the removal of general partners, terminating the partnership, amending the partnership agreement, or selling all or most of the assets of the partnership, without jeopardizing limited partner status.

 

How is a limited partnership formed?

 

Delaware:  

 

• The Delaware Revised Uniform Limited Partnership Act, 6 Del. C. § 17-101 et seq. ("DRULPA") governs Delaware limited partnerships.  

 

• A Delaware limited partnership is formed when (1) at least two parties have an agreement to form and operate a limited partnership with at least one being a general partner and at least one being a limited partner, and (2) the general partner executes and files a certificate of limited partnership with the Delaware Secretary of State.  

 

• The certificate of limited partnership needs to only contain the following information:

  • the name of the limited partnership, which must contain the words "Limited Partnership" or the abbreviation "L.P." or the designation "LP,"

  • the address of the limited partnership's registered office in the State of Delaware,

  • the name and address of the limited partnership's registered agent in the State of Delaware, and 

  • the names and addresses of the general partners.  

 

• Once formed, the limited partnership's partnership agreement and DRULPA govern the operation and management of the limited partnership.  The partnership agreement may be written, oral or implied (although any oral agreement also may be subject to the statute of frauds).  The written partnership agreement may modify many of the default provisions of DRULPA.  

 

New York:

 

• The NYPL, Article 8-A, the Revised Limited Partnership Act (“NY LP Act”), governs New York limited partnerships.  

 

• A New York limited partnership is formed when (1) at least two persons have an agreement to form and operate a limited partnership with at least one being a general partner and at least one being a limited partner, and (2) the general partner executes a partnership agreement, and executes and files a certificate of limited partnership with the NY Department of State.  

 

• The certificate of limited partnership needs to only contain the following information: 

  • the name of the limited partnership, which must contain the word “Limited Partnership” or the abbreviation “L.P.”,

  • the county within New York, in which the office of the limited partnership if to be located,

  • a designation of the Secretary of State as agent of the limited partnership upon whom process against the limited partnership may be served and the post office address within or without New York to which the Secretary of State is to mail a copy of any process served upon him or her,

  • if the limited partnership is to have a registered agent, such registered agent’s name and New York address and a statement that the registered agent is to be the agent of the limited partnership upon whom process against the limited partnership may be served,

  • the name and business or residence address of each general partner, and

  •  the latest date upon which the limited partnership is to dissolve.

 

• The limited partnership is formed upon the filing of the certificate of limited partnership with the NY Department of State, or such later time specified in the certificate, not to exceed 60 days from the date of filing. There is filing fee associated with such filing.

 

• Publication Requirement: Section 121-201 of the NY LP Act requires that within 120 days after the filing of the certificate of limited partnership, a limited partnership must publish in two newspapers, once a week for six consecutive weeks, a copy of the certificate of limited partnership or a notice containing the substance thereof. The newspapers must be designated by the county clerk of the county in which the office of the limited partnership is located. After publication, the printer or publisher of each newspaper will provide the limited partnership with an affidavit of publication. A certificate of publication, with the affidavits of publication of the newspapers attached, must be submitted to the NY Department of State. There is filing fee associated with this filing

 

• Once formed, the limited partnership’s partnership agreement and the NY LP Act govern the operation and management of the limited partnership. The partnership agreement can modify many of the default provisions of NY LP Act.

 

What are the advantages of a limited partnership?

 

• Tax Benefits. As with a general partnership, the profits and losses in a limited partnership "pass through" the business to the partners, all of whom are taxed on their personal income tax returns. While limited partners are entitled to share in the profits and losses of the partnership as per the limited partnership agreement, they do not have to participate in the day-to-day operations of the business itself.

 

• Liability Liability. A limited partner's liability for the partnership's debt is limited to the amount of money or property that individual limited partner contributed to the partnership. This is not true of the general partnership, where any money or property contributed becomes an asset of all the partners.

 

• Flexibility for General Partner. In a limited partnership, the general partners deal with the daily operations and responsibilities and don't need to consult the limited partners for most business decisions who play a primarily passive role in management.

 

• No turnover issues. Limited partners can be replaced or leave without dissolving the limited partnership.

 

• Ability to Attract Investment. A limited partnership structure permits investors to participate as limited partners and benefit from the profits and losses without undertaking the burden of running and managing the partnership.

 

What are the disadvantages of a limited partnership?

 

• Risk to General Partners. Unlike the limited partners, the general partner is personally liable for all the debts and actions of the partnership. This risk can be mitigated by having the general partner be a business entity with limited liability such as an LLC.

 

• Risk to Limited Partners. The limited partners must rely on the business acumen and competence of the general partner in running the business. The limited partners can lose all or a substantial portion of their investment in the limited partnership. If a limited partner "crosses the line" and actively participates in the management and running of the business, it may incur personal liability akin to a general partner.