A limited partnership is a form of business ownership that consists of one or more general partners and one or more limited partners. A limited partnership is commonly used when there are passive investors who are not interested in the day-to-day management of the business but are simply interested in sharing in the business’s profits. They are also used by families to control and protect family assets and estates.
State limited partnership laws control the formation of limited partnerships and limited partners may be required under state law to register with the state. Generally, there are minimal filing requirements and fees for limited partnerships.
Advantages in General
A limited partner is not liable for the debts or obligations arising from the negligence, misconduct, or malpractice of another partner, employee or agent. A limited partner can incur unlimited personal liability, however, if he asserts control over or manages the partnership in some way. When a limited partnership is formed for investment purposes, the limited partner usually enjoys priority in the business’s profits and tax advantages. However, state laws require the general partners to file a detailed prospectus before limited partners can invest in a limited partnership. State laws also limit the number of limited partners that can join a limited partnership.
Upon the dissolution of a limited partnership, a limited partner can be held liable for the general debts of the partnership, but such liability cannot exceed his or her initial contributing capital. Another advantage is that a limited partnership does not have to be dissolved in order for a limited partner to join or leave the limited partnership. A limited partnership interest may be transferred to another, subject to the general and limited partners’ right of first refusal.
There are several tax advantages to a partnership. There are no separate taxes on the income of the partnership, thus there is no threat of “double taxation.” (Double taxation occurs when both an individual and a business are taxed on the same income.) However, the partnership must file a statement indicating each partner’s profits and losses. Each partner is personally liable for their own taxes, and may be taxed at a higher tax rate depending on the amount of income received from the partnership. However, each partner is entitled to deduct their proportionate share of the partnership’s income and losses on their tax return.
One of the primary disadvantages is that a general partner, or a limited partner acting like a general partner, can be held responsible for the acts of another partner, employee or agent. Liability attaches when the partner, employee, or agent acts on behalf of the partnership and in furtherance of partnership business.
Another potential disadvantage is that partners are taxed on a partnership’s profits whether or not those profits are actually distributed, and the top personal income tax bracket is taxed at a higher rate than that of the highest corporate tax bracket. Additionally, partners are responsible for self-employment taxes.
While the limited partnership has several advantages such as “pass-through” profits and losses for tax purposes, there are also disadvantages to this type of business entity, including the loss of limited liability protection for limited partners in certain situations. A limited partner may acquire unlimited personal liability for the negligent acts of other partners if he assumes management authority or attempts to control the partnership in any way.