Your Guide to Business Entity Types: Limited Partnership
Next up in the blog series, Your Guide to Business Entity Types, from Morris Law Group, is limited partnerships. In today’s article, we’ll be discussing what a limited partnership is, how it works, and how it differs from other business types.
Read on to learn more, and if you need assistance from a Minnesota business attorney, reach out to Morris Law Group today.
What Is a Limited Partnership?
A Limited Partnership (LP) is a business structure in which the company is run for-profit with two or more owners. An LP is organized in the state in which it will operate and is governed by the laws of that state. An LP may organize with one or more general partners and/or one or more limited partners. In an LP, each partner signs the Partnership Agreement that governs the management structure of the organization, and it is taxed like a general partnership.
The Certificate of Limited Partnership
An LP is organized by filing a Certificate of Limited Partnership with the office of the Secretary of State in the state in which it conducts business. Typically, the state laws governing a LP are based on a version of the Revised Uniform Partnership Act and act as the default rules for the operation of an LP and the drafting of the Limited Partnership Agreement.
Management Structure
The management of a limited partnership is generally conducted by the general partners, while the limited partners have no rights in the control of the business. However, liability also differs between general partners and limited partners.
Liability
The general partners do not have a liability shield for their actions and are thus personally liable for the obligations of the limited partnership. The limited partners on the other hand, in a trade-off for not having management responsibilities, are provided with a liability shield. Therefore, limited partners may lose any capital investment made into the limited partnership, but their personal assets cannot be reached to pay for debts and obligations of the limited partnership.**
Taxes
As for taxation, the IRS treats an LP the same as a general partnership. A general partnership is usually taxed under subchapter K of the Internal Revenue Code and consists of provisions designed for the taxation of a business organized as a partnership. Under this subchapter, a general partnership is not required to pay federal income tax, but allocates its profits or losses to the partners as assigned by the partnership agreement, and is then reported on the partners’ personal federal income tax return.
Learn More About Limited Partnerships
Interested in learning more about limited partnerships or another business entity type? It’s time to reach out to the team of Edina business lawyers at Morris Law Group. Contact us today to schedule your free, no-obligation consultation.
* Liability does not extend to acts of negligence, wrongful acts, or misconduct.
** Many states make an exception for the limited liability of any limited partner that engages in management responsibilities.