A limited partnership business structure enables the creators of the business to separate the managers and the investors. For a lot of business owners, this is crucial.
Difference between General Partners and Limited Partners
Limited Partnerships have two kinds of partners: general partners (usually the initial creators of the business who will do the managing) and limited partners (typically investors). The limited partners are not subject to personal liability for the company’s debts, acts, and obligations—hence the willingness to invest. The distinction between the two kinds of partners enables the general partners (initial creators) to run the business how they envisioned while keeping the investors (limited partners) out of day to day management.
Pros of a Limited Partnership
- A limited partnership has most of the bells and whistles of a general partnership with one fundamental difference—limited partnerships allow for “limited partners.”
- The limited partners in a limited partnership are not subject to personal liability for the company’s debts and obligations, and therefore investors are more attracted to limited partnerships than they are to general partnerships.
- Like general partnerships, limited partnerships are not taxed as a separate entity but each partner reports their own net profit or loss on his/her tax return.
Cons of a Limited Partnership
- General partners’ personal assets are not protected in the event that the company defaults on its obligations or is sued.
- If limited partners participate in managing the company they subject themselves to personal liability.
- Unlike a general partnership where it is not necessary to register the partnership with the secretary of state, a limited partnership must be registered.
- Limited partnerships require compliance with more legal formalities than general partnerships in order to ensure limited liability of the limited partners.
- Any general partner can cause the partnership to be liable for contracts, torts, and even crimes. This also means that one general partner may be held personally responsible for the bad acts of another general partner.
- Partnership Agreement. Having a partnership agreement is crucial. Partnership agreements operate to protect the partnership/company as well as the partners themselves. Partnership agreements dictate how the company should be managed, how disagreements should be resolved, ownership interests, allocation of profits and losses, and a host of other issues that may arise in the course of the company’s existence.
- Buy-Sell Agreement. In a partnership arrangement it’s important that there is an exit strategy in place. In the event that one partner in the venture decides to part ways, a buy-sell agreement protects the company and the remaining partners. This kind of agreement provides for one or more of the remaining partners to buy out the departing partner’s interest in the company.
- Business Name. If you’re operating under a trade name / business name, register that name with the state. Click here to learn more about DBAs.
- Business License. Obtain all licenses required by the county where you will be conducting business.
- Insurance. Because the general partners are not afforded limited liability protection like limited partners are, insurance can help protect the general partners personal assets in the event of a lawsuit or default on a company obligation.