What is a limited partnership?

A limited partnership is a business structure in which one or more of the partners involved run the day-to-day business operations, while the limited partner (or partners) have no involvement. The level of liability for a limited partner is determined by their level of investment in the company.

Types of partnerships

There are three types of business partnerships: general partnerships, limited partnerships, and limited liability partnerships.

General partnership

In a general partnership, two or more individuals come together to form a business alliance. This is the simplest form of partnership, as it begins immediately when the partners start their business activities. There is no formal paperwork required for a general partnership. 

In this type of partnership, all members share unlimited liability, which means that each partner is completely liable for the actions of any of the other partners. General partnerships can be easily dissolved at any time, and in fact dissolve automatically if a partner bankrupts or dies.

Limited partnership

Limited partnerships offer more protection. In this type of partnership, at least one partner takes on the responsibility of operations and unlimited liability. The other partners hold financial stakes, but are only liable for what they have invested in the business. Unlike a general partnership, a limited partnership must be filed with your state. 

Limited liability partnership

An LLP is a form of partnership in which all partners are protected from the actions of the other partners. Each member of the partnership has limited liability. An LLP is very similar to an LLC (limited liability corporation) in that they maintain flow-through taxation status. This type of partnership may seem ideal when compared to the others, but an LLP is limited to certain professions like doctors, accountants, and lawyers. 

When should you form a limited partnership?

A limited partnership can be good for your business if you are someone who is looking to raise capital from a small group of investors. You must be willing to take on all operations and decision-making connected with your business, and the partners you collect must be willing to be passive investors. 

Limited partnership is ideal for those who need capital (there’s no need for an LP if you have enough money to get started on your own), and who can find partners who are not looking to have an active role in a business. 

How Much Does it Cost to Start a Limited Partnership?

The cost to start a limited partnership can vary depending on what your business goals are. In a sense, you really don’t need any capital at all. The whole point of a limited partnership is to find investors. If you are someone with a strong business plan and a lot of charisma, you could potentially raise what you need from family, friends, and your community. 

You will have to set a certain amount aside for the legal piece. You’ll want to get the advice of a lawyer, and possibly an accountant to create your formal partnership agreement. While this isn’t strictly necessary, it is definitely a best practice. 

How to Form a Limited Partnership

The first step to forming a limited partnership is to have a detailed business plan that you can share with potential investors. Remember, you are the one taking on all the responsibility, so you have to demonstrate to your potential limited partners that you are reliable and trustworthy to run a business. You need to have demonstrable and realistic goals to share, as well as a detailed plan to demonstrate how you propose to achieve them. 

Next, you need to draft a partnership agreement. While it’s not unheard of for a partnership to have been formed by a handshake, a formal agreement is more common and by far the better way to do things. This agreement should be signed by all partners and kept on file. Here is the information that should be covered in the agreement:

  • Contact information for all partners
  • Who is managing operations? 
  • How is ownership divided among the partners?
  • What will the limited partners contribute to the business?
  • What is the plan if a partner decides to leave the partnership? How will their financial stake be resolved?
  • A plan for conflict resolution. How will you handle disputes among partners? Who will have the final say? What happens if there are irreconcilable differences?
  • How will you distribute profits and losses among members? 
  • Are any of your partners family members, and will these members have special privileges or limitations?

Now you need to find a name for your business. Every state has its own regulations regarding how you include partner names in a business, so make sure to consult your state law first. Once you have a name picked out, you’ll need to make sure that it hasn’t already been taken. Check your secretary of state website–most have an online search feature that you can use to find out if a name is already being used. 

Finally, you need to register your partnership through the state. Here are the steps you’ll need to follow:

  • If your partnership is scattered over multiple states, you must choose a home state for operation. 
  • Research what licenses are required to operate in your state, and then apply for them.
  • Complete the certificate of partnership and submit it to your secretary of state
  • Appoint a registered agent. This is someone who will be available in a physical office during business hours to receive any business documents. You can hire someone to do this through a professional service. 
  • Submit your application (this can typically be done online through your secretary of state website).
  • Once approved, keep all documents filed permanently in a business archive. 

The Benefits of a Limited Partnership

There are several benefits to both the full partner and limited partner in a limited partnership. Some of these include:

1. A limited partnership is a great way to raise investments for your business.

If you have an amazing idea, but can’t raise the capital to get if off the ground, a limited partnership can be the way to go. 

2. In a limited partnership you retain complete control over your business.

None of your partners is involved in the day-to-day of operations, and they don’t have a say in the business decisions. 

3. There are tax benefits to a limited partnership.

All partners are taxed on their income returns, rather than taxed twice through income and corporate taxes.

4. Limited partners may leave a partnership without having to dissolve the partnership.

This makes the whole business more simple to deal with, and less precarious than a general partnership. 

5. There is less paperwork to file with partnerships.

Especially in comparison to the requirements for creating a corporation or an LLC. 

6. A limited partner has the opportunity of taking on the profits and losses of a business, without actually having to get involved in the work.

For this partner it is more of an investment opportunity. 

There are a few disadvantages to running a limited partnership as a general partner or partners. The general partner has to carry the entire burden of the business’s debts and obligations. If the company becomes bankrupt, all debts and liabilities are the responsibility of the general partners. The limited partners only lose what they invested, and are not responsible for anything else. 

Also, while a limited partnership requires less paperwork, you still have obligations to your investors. As a general partner you will have to hold annual meetings to share financial information, and create a detailed partnership agreement to protect all parties. 

Conclusion

So, what is limited partnership? It’s a business system that allows for you to gather investors without the more complex machinations of creating a corporation. If you are someone who wants to retain full control of your business, but needs to find capital outside of the traditional lending institutions, a limited partnership is a good way to make that happen. 

Just make sure that before you get started, you’ve really studied the pros and cons to ensure that this is the best format to bring about what you envision for your company. It’s not enough to simply define limited partnerships, you want to understand how this system would affect your operations. 

If you really understand the ins and outs, are willing to absorb the risk and take the time to draft a solid partnership agreement, then a limited partnership can be a fantastic opportunity to launch your small business.

North One is a simple and fast Business Deposit Account. We help builders and makers manage their money by making banking effortless. Keep your personal and business finances separate and apply for an account now!