Limited Partnerships | Request More Information |
| Limited Partnerships combine attributes of corporations with those of partnership. Using a limited partnership structure, investors get the protection of limited liability like corporations, but maintain flexibility in allocating profits and losses among partners. This structure is most frequently used by venture capital firms to raise money. It enables investors to receive the profits and losses generated by the fund's investment without the obligation of paying corporate income tax. They are also used by young companies to transfer company losses to investors as a method of attracting equity. Transferring losses reduces an investor's after-tax cost of providing the equity. Limited partnerships have two types of partners, general and limited. Limited partners traditionally provide funding to the entity and, by virtue of their limited partnership status, receive limited liability much like that of a corporate shareholder. The general partners do not receive limited liability and customarily manage the business. Limited partners, unlike corporate shareholders, are generally prohibited from becoming involved with the active management of the partnership. If they do become involved, they risk being treated like general partners and becoming personally liable for the actions of the entity. Limited partnerships must be structured carefully. Obtaining the tax benefits of a limited partnership depends upon close compliance with Internal Revenue Service rules that govern, for tax purposes, the differences between corporations and partnerships. A limited partnership must qualify as a partnership to obtain the special tax treatment. Generally a certificate of limited partnership is required and it must be signed an filed with the secretary of state's office. If the requirements are not met, the business will be treated as a general partnership or an association taxable as a corporation. A certificate of limited partnership contains information about the limited partnership such as its name, address, purpose, who the general partners are, and their business address etc. The requirements of each state vary. There are generally four factors the Internal Revenue Service looks at when determining how to tax a limited partnership:
| A limited partnership agreement contains the same basic information that a general partnership agreement does, but addresses some additional provisions pertaining to limited partners. A limited partnership agreement should address:
Additional topics to be included in a partnership agreement if applicable:
A limited partnership is generally not regarded as the best choice of entity for a new business because of the filings and administrative complexities. For a new business with two or more working partners, a general partnership would be much easier to form. If a limited partnership is needed at a later date, the general partnership can be easily converted to a limited partnership. There are some situations in which the limited partnership form for a new business may be desirable. One such instance is a business in which the owner needs to raise capital yet still control the way the business is operated. If that applies to you, you might consider forming a limited partnership and selling limited partnership interests to investors. Compiled from IRS publications |
