If you are considering establishing your business as a limited partnership (LP), it is important to understand the pros and cons involved with this type of legal entity. It is similar to a general partnership, but the partners have a separate and limited status. This can be extremely beneficial if the partners desire protection from liability.
A LP is commonly used by businesses that partner on a single project or for a limited term. For example, LPs are frequently used in real estate development projects. The general and limited partners work together on a construction job with the limited partners investing money while the general partners manage the daily operations of the business venture. A LP is attractive to investors who want to invest their money, but also want limited liability.
Below are a few of the other advantages offered by forming a LP:
- The LP agreement is typically a privately signed document (it usually is not recorded or available to the public) and allows for anonymity if desired
- It provides a legal framework for starting a business and, as a separate legal entity, it can own property
- Pass-through taxation benefits (profits are reported on the partners’ personal tax returns)
- Forming a LP assists with establishing credibility for the business
- You can deduct employee benefits
- A LP provides protection from litigation. If a limited partner is sued, the assets owned by the LP are protected. Conversely, if the LP is sued, the limited partners can be protected from liability.
There are a few disadvantages of a LP that must be considered as well, including:
- The general partner has the burden to run the business and is liable for the obligations and debts of the LP
- There is paperwork required to from a LP and to comply with the required corporate formalities to keep the business in good-standing
- There is divided authority among partners
The key to a successful LP is the LP agreement. It must be carefully drafted by a professional and properly maintained once formed. If you are interested in creating a limited partnership, contact the legal team at The Swenson Law Firm for assistance.