Business Law

The Pros and Cons of a Limited Partnership

Reviewed by Diana Fitzpatrick, J.D., NYU School of Law

A general partnership is a popular legal structure for people who want to go into business together without a lot of paperwork or start-up costs. A written or oral agreement can serve to create the partnership and then the partners can formally or informally decide how to run the business. A general partnership usually works best when there are just a few partners involved since everyone shares equally in the management and responsibilities of the business.

One of the drawbacks to a general partnership structure, however, is that the partners can’t sell ownership interests in the business to raise money. By comparison, with a limited partnership, the general partners can raise money from outside investors by selling interests in the partnership without giving up any management control.

Limited Partnerships

To form a limited partnership, you must file a certificate of limited partnership with the secretary of state or other governing state office. A limited partnership must have at least one general partner and one limited partner. The general partner is responsible for managing the business. The limited partner is a passive investor who invests in the business but is not involved in managing the business on a day-to-day basis. All partners in a limited partnership individually report and pay taxes on their share of the profits from the partnership. Unlike general partners, however, limited partners income is not considered earned income for tax purposes so they generally don't have to pay self-employment taxes.

Personal Liability Protection

A limited partner has limited liability protection as long as the limited partner does not materially participate in the management of the business. Business creditors can only sue a limited partner for the amount of money the limited partner has invested in the partnership. This is the same type of protection as a person who buys shares of stock in a corporation.

The general partners in a limited partnership, on the other hand, are personally responsible for all business obligations. To avoid the consequences of full liability, partners sometimes form a corporation or limited liability company to act as the general partner of a limited partnership.

A Business Lawyer Can Help

The law surrounding the creation of a limited partnership is complicated. Plus, the facts of each case are unique. This article provides a brief, general introduction to the topic. For more detailed specific information, please contact a business lawyer.

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