Business Entities Explained: Limited Partnerships
A limited partnership is a specific kind of organization created by state law that restricts some participants' responsibility. A limited partnership must have at least two types of partners: a general partner who is responsible for management of the business; and limited partners who do not participate in the management but have invested capital or provided services.
Here are some of the benefits and drawbacks of this form of business type.
Advantages
Capital Amounts
Given that there may be multiple limited partners in the partnership, a significant amount of capital can be raised. The volume of business immediately increases as a result of the significant quantity of funding that is raised.
2. The Continuation of Existence
Limited partnership interests may be transferred from one person to another meaning that the business continues operating uninterrupted even if one or more limited partners dies.
3. Tax Benefits
Limited partnerships do not pay income tax directly so there is no double taxation of income. Income is distributed to the partners and the partners are liable to pay tax at their respective tax rates. Partners may also deduct partnership losses from their income tax returns.
Disadvantages
The General Partner's Liability
At least one general partner must assume responsibility for all of the debts and obligations of the partnership. The general partner’s assets are at risk to creditors of the partnership.
2. Greater Formalities
Organizational costs rise as a result of the increased formality required. A limited partnership agreement typically requires a lot of "customizing" and is consequently fairly expensive to prepare. To operate in a state or commonwealth other than the one in which the organization was formed, you must be authorized to do business there.
3. Limited Participation Rights
Limited partners may not participate in the management of the business. This limitation may be unacceptable to some potential investors.
Who Should Use the Limited Partnership Business Structure?
LPs are suitable for businesses which require capital but want to have control vested in a small management group or entity. LPs are often used for real estate development projects, hedge funds and investment partnerships since it enables them to obtain financing without giving up control.
‘’Limited Partnerships can be very effective vehicles for sponsors or experienced management teams who want to raise capital but not relinquish control.” - John
