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How to Incorporate - The Limited Partnership
Formed by filing a certificate of limited partnership with the Secretary of State. This is primarily used to raise money from “passive” investors (the limited partners) who will not be active in the business. LPs must have two categories of partners: one (or more) general partners, who are personally liable for all partnership obligations, and one (or more) limited partners, who have no liability for partnership debts.
Advantages
- Limited liability – investors’ liability is limited to their respective investments in the partnership.
- Separate entity – may sue and be sued, own property, protect its limited partners from unlimited liability, may raise capital by selling interests in the partnership, borrow money and exist independently of its partners’ mortality.
- Management authority – managed by the general partner and not subject to decision making by limited partners.
- Profits and losses may be allocated unequally among partners, so as to distribute tax benefits favorably.
- Excellent vehicles for estate planning purposes, when used properly.
Disadvantages
- Accounting and tax law very complex. Tax professional required.
- Limited life – does not live in perpetuity, but lives for a stipulated period usually for the economic life of the assets its owns.
- Lack of control – limited partners have no voice in management once the investment is made in the partnership.
- Securities regulation – to raise money requires securities registration if offered to the public and advertising or solicitation is used to attract investors.
- Terminating a partnership may result in tax liability for the partners.
Tax Implications
- A partnership is a tax-reporting entity (IRS Form 1065) separate from its owners, but it is not a federal tax-paying entity. Instead, a partnership’s profits or loss passes through to the individual partners. Each partner must report his share on an individual Form 1040 tax return.