Basics of a Limited Partnership

Posted: May 7, 2009 1:41 PM
Updated: May 7, 2009 1:41 PM

Real Small Business: Building Your Business

From the Editors of Real Small Business

Limited partnerships are typically used for real estate investing or in situations where a business is looking to finance expansion. For most small businesses, forming a general partnership or an S corporation will meet their needs.
In circumstances where they are appropriate, limited partnerships provide many of the benefits of partnerships and corporations. They provide a way for small businesses to raise money without taking in new partners, forming a corporation, or issuing stock.
A limited partnership must have one or more general partners, who have the same responsibilities and liability restrictions as they would in a general partnership. In addition, there are one or more "limited" partners, typically investors not involved in the day-to-day activities of the company.
These limited partners are not personally liable for debts of the partnership, and they get the same tax advantages as a general partner. However, they do have significant restrictions. They can not, for instance, be involved in the management of the company (with few exceptions). If they are, they may become personally liable for the partnership's debts.
Creating a limited partnership can be as complex and costly as forming a corporation. It is advisable to hire an attorney to assist you in conforming to the various filing requirements in your state.
Benefits
Ability for partnerships to raise money without involving outside investors in day-to-day business decisions
Limited partners get limited personal liability and greater tax advantages
Disadvantages
Complex and costly filing procedures
General partners still have personal liability for company's debts and actions