There are many different ways to open a business, each with their own benefits and disadvantages. Knowing what business structure is right for your goals is essential, so here we’ll explore what a limited partnership agreement is and the advantages of establishing one.
What is a partnership?
A partnership in business is a legal relationship between two or more parties who agree, in writing, to invest in a business. A partner can be a person or an organisation, and ownership in a partnership does not have to be evenly spread. A limited partnership agreement is just one type of partnership, but the most common is a general partnership.
Partnerships vs. corporations
In a general partnership, the responsibilities, expenses, liabilities and profits are shared between each partner. This is different from a corporation, wherein the shareholders don’t need to be involved in management and operations. A partnership is much easier to establish than a corporation.
One of the most notable differences between a partnership and a corporation is that owners of a corporation cannot be held personally liable for the debts of the business, while in a general partnership the partners do carry this liability. That is only the case for general partnerships, though; limited partnerships on the other hand, divvy liability a bit differently.
What is a limited partnership?
In a limited partnership agreement, there are two different classes of partner with different roles and responsibilities – the general partner and the limited partner. A limited partnership must have at least one of each of these classes of partner, and one individual cannot undertake both roles.
The general partner in a limited liability partnership manages the business. They are responsible for day-to-day operations and decisions. On the other hand, the limited partner does not handle any of the management and operations and is not required for business decisions. Instead, limited partners are almost more of an investor, they put money into the business without handling the actual running of the company.
With power comes responsibility, and the general partner in a limited partnership is always held personally liable for the debts and legal obligations of the partnership. If there are multiple general partners, they share this liability. Meanwhile, the limited partner doesn’t have any management power in the business, but their personal liability in the partnership is limited to the value of their investment. So, while a limited partner might lose what they put into the partnership, their personal assets are never at risk of being seized by creditors.
The limited partner does not have to pay any self-employment taxes, while the general partner does, because limited partners receive dividends as opposed to regular income. In order to ensure their liability remains limited, the limited partner must refrain from taking any active role in the management of the business.
A limited partner is unable to withdraw their original investment, but can negotiate future investments.
What is a limited liability partnership?
A limited partnership is not to be confused with a limited liability partnership. In a limited liability partnership, every partner has limited liability, and every partner is able to be involved in the management of the business.
Generally, the partners in a limited liability partnership will sign a partnership agreement to determine how the responsibilities of the business are shared. Partners in a limited liability partnership are taxed on their share of the income, like in a general partnership.
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