how to form a limited partnership
almost all u s states govern the formation of limited partnerships under the uniform limited partnership act which was introduced in 1916 and has since been amended many times the majority of the united states 49 states and the district of columbia have adopted these provisions with louisiana as the sole exception 5to form a limited partnership the partners must register the venture in the applicable state typically through the office of the local secretary of state the business permits and licenses that are required vary according to locality state or industry the u s small business administration sba lists all local state and federal permits and licenses that are necessary to start a business 6in addition to external filings the partners of a limited partnership must draft a partnership agreement this is an internal document that defines how the business will be operated the agreement outlines the rights responsibilities and expectations of each partner the document is not filed with a government entity the partnership agreement should identify two key financial aspects of the company advantages and disadvantages of an lpthe key advantage to an lp for its limited partners is the protection from personal financial liability beyond the amount of their investment the general partners are willing to take the biggest risks in order to raise capital for their investments lps are pass through entities for all partners meaning the entity files a form 1065 the partners receive schedule k 1 forms to report their portion of the income or loss on their own personal tax returns 7 limited partners don t have to pay self employment taxes as they are not active members of the business another advantage is the ease of creating and maintaining a limited partnership because the structure of the partnership is less formal than other partnerships they can be more straightforward to set up they are also straightforward to maintain partners do not have to participate in any sort of annual meeting on the downside lps require that the general partner have unlimited liability they are responsible for all management decisions and are liable for any debts or mishandling of the business 4limited partners must stay out of business operations if they want to maintain their liability protection if their role is deemed non passive they lose personal liability protection the structure of a limited partnership also comes with some downsides they can be more difficult to transfer ownership of than a business such as an llc and there is less flexibility for changing management roles within the business personal liability protection for limited partnerspass through entity for taxationease of creation and reportingno self employment taxes for limited partnersgeneral partners have unlimited personal liabilitylimited partners barred from management decisionsdifficulty transferring ownershipless flexible for changing management roleslp vs llclimited liability companies llcs and limited partnerships share several similarities both entities have a certain degree of freedom in how they define the role of the entity s members and the entity s structure this includes having control over voting financial terms or fiduciary responsibilities of each member both types of entities also incur pass through tax treatment this means each investor is subject to reporting their share of the entity s profit on their personal tax returns neither type of company is subject to federal income tax 7there are also differences between the two types of legal entities however starting with the corporate structure limited partnerships contain general partners and limited partners while a limited liability company may have as many members as it wants in general all members of an llc usually have the right to manage the business while limited partners of an lp cannot be active participants 4another key difference is in liability general partners of an lp have unlimited personal liability meaning they may be held liable for any debts and obligations of the company limited partners are often not liable for partnership obligations llcs on the other hand often provide corporation like protection for members in which members are not held directly liable for the company s debts 4finally llcs have a bit more flexibility regarding how they are taxed llcs can elect to be taxed as a c corporation an s corporation or a disregarded entity 8 both an llc and lp s default tax status is to be taxed as a partnership composed of general partners and limited partnerslimited partners not active in the daily managementgeneral partners can have personal liabilitytaxed as partnershipscan have many owners all referred to as membersall members can have the right to participate in managementno personal liabilitymay be taxed as a partnership c corp s corp or disregarded entitylimited partnership and taxeslimited partnerships are treated similarly to general partnerships in regard to taxes limited partnerships are treated as pass through entities and file form 1065 as an information return the limited partnership also provides a schedule k 1 to each partner so that their share of business income and losses can be reported on the partner s individual tax return 9if the limited partnership were to incur a loss each partner could deduct this loss on their personal returns up to the amount of their investment in the company partners can also carry losses to future years if the loss is greater than their investment to date amount income or losses from a limited partnership are called passive gains or losses this is because each partner is not actively participating in the business this is especially important for tax reasons as passive activity can only be offset by other passive income passive losses can only be used to offset passive gains this also plays a key part in self employment taxes limited partners do not pay self employment tax on most payments as they are not active participants in the business general partners usually have to pay self employment taxes 10