What is a Limited Partnership?
A limited partnership (LP) is a business made up of two or more partners, including at least one general partner and one limited partner. The structure combines the financial resources of limited partners with the management abilities of general partners.
General partners are fully responsible for the day-to-day management and business decisions of the partnership. They also have unlimited personal liability for the debts and obligations of the business.
In comparison, a limited partner is a passive investor. They have a financial investment in the partnership, however, they are not involved in the management of it. In return, their liability is limited to their investment in the business.
The specific regulatory requirements around LPs vary among states. Generally, an LP must be registered by filing an application with the local Secretary of State.
LPs typically also need to prepare a partnership agreement, which at a minimum sets out the following:
- partners' contributions
- management responsibilities
- profit and loss sharing
- partner exit policy or strategy
A partnership agreement is binding and should be reviewed, if not drafted and negotiated by, a business law attorney in California to make sure the terms and conditions reflect the interests of the partners and the partnership. At Duvel Law, APC., our corporate lawyer helps clients who want to form a business and are trying to determine the best business structure. Contact us today at (714) 542-5100 to schedule a Free Consultation and learn more about how we can help you form and grow your business.
Common Reasons to Establish a Limited Partnership in California
LPs are especially suited to investment projects. They are often used for commercial real estate ventures (e.g., apartment complexes) where a general partner manages the project and the limited partners receive income from it.
Family limited partnerships are also common. With members of the older generation as the managing partners, the younger generation pools their investment as limited partners. Eventually, the limited partners may eventually inherit the business and become general partners.
LPs can also be used for estate planning purposes, protecting an income-generating asset, such as a piece of real estate, from being sold upon the death of the parent who is typically the general partner.
Advantages of a Limited Partnership in California
Advantages of a limited partnership are many. Some of the more commonly known advantages include the following.
- Limited partners enjoy limited liability. Limited partners can only be held liable for the debts and liabilities of the partnership up to the amount of their investment. This protects their personal assets in the event the partnership goes bankrupt or is sued.
- General partners have full control. They don't need to consult with limited partners when making business decisions.
- LPs are pass-through business entities for tax purposes. The profits and losses of the partnership are passed on to the partners, who declare them in their tax returns so they are taxed at the personal rate. Federal income tax is not paid at the entity level, avoiding double taxation.
- Limited partners do not pay self-employment taxes. Only general partners pay self-employment taxes (Social Security and Medicare) on their earnings.
- Limited partners can easily leave the business. If a limited partner decides to leave, the partnership can continue with minimal disruption to its management given their participation was only via investment.
These combined benefits make LPs attractive to investors. Thus, projects that need large amounts of capital should consider forming a limited partnership. There are some downsides to LPs that must also be factored into any decision on business formation.
Disadvantages of a Limited Partnership in California
Commonly known disadvantages of a limited partnership include the following.
- Unlimited liability of general partners. General partners are fully and personally liable for the debts and liabilities of the partnership. If a partnership declares bankruptcy or is sued, a general partner's personal assets may be used to pay creditors. As a result, general partners are typically compensated generously for their role in the partnership.
- Limited partners' lack of control. Limited partners have no say in the daily management and operations of the partnership. The inability to control the partnership in any shape or form can lead to conflict or disputes arising about key business decisions. If a limited partner starts participating in management decisions, they risk losing their limited partner (and limited liability) status.
- More onerous compliance requirements. Unlike a general partnership, LPs are typically required to hold investor meetings and provide all partners with access to their financial records.
As mentioned, it is crucial to take these factors into account when deciding whether a limited partnership is the right structure for your business.
What's the Difference Between an LP and an LLP in California?
LPs and limited liability partnerships (LLPs) both consist of partners who come together to form a business.
There are, however, two key differences between them.
- An LLP does not have general partners. This means that every partner's liability is limited. In comparison, only the limited partners in an LP have limited liability; general partners in the LP can be held personally liable.
- All the partners in an LLP can participate in its management, whereas in an LP, only the general partners can do so.
Contact a Corporate Lawyer in Orange County Today
If you are thinking about creating a limited partnership, there's much more to it than filling out simple forms and paying a fee. You need a partnership agreement, sufficient insurance coverage, mandatory reporting, and more. Our experienced corporate lawyer in Orange County will evaluate your business and help you form a partnership using the best model for your purposes. To protect you and your partners' interests, contact Duvel Law, APC. today by filling out the online form or calling us at (714) 542-5100 to schedule a Free Consultation.