Limited Partnerships – Houston Law Firm
Partnerships can take a variety of forms. A partnership can be a limited liability partnership, limited partnership, and a general partnership. This post by RunRex.com focuses on what a limited partnership is, what it entails and how it differs from the other types of partnerships.
A limited partnership is a partnership that exists when at least two partners come together to conduct business together in which only one of the partners is liable to the extent of the money they invested in the partnership. With limited partnerships, the limited partners do not receive dividends, but they can access the flow of expenses and income of the venture. The owners of ventures under this structure are usually not liable for the company’s debts.
How Limited Partnerships Operate
In such partnerships, there is usually one general partner. This party is the one who is responsible for the daily management of the company or business formed with the partners. Also, they are the ones liable for the liabilities and the debts of the company given that they have complete control of the company management.
There can be one or more partners who invest in the company. These are normally referred to as silent partners given that they have no control over the business and they only invest their share of capital and reap the company’s profits in return. Their liability is only limited to the amount they have invested in the partnership.
Tax compliance in limited liability companies
Like other partnerships, individual partners of the company pay the income taxes depending on their individual shares in the company. This distributive share, as it is normally called, is passed through the personal tax return on the owner and the income taxes of the partners paid using the rate of the individuals.
How to form a limited partnership
The laws governing the formation of Limited Partnerships for most states are under the Uniform Limited Partnership Act. To establish such a partnership, the first step is for the partners involved to register the venture with the office the Secretary of State. Depending on the location at which the company is intended to be established, the partners are required to obtain all the legal documents like business permits and licenses. Ensure that you have all the local permits, state permits and federal permits that are required so that you operate your business venture legally.
There are two approaches you can take when handling the formation process. First, you can seek the services of a qualified and well-respected attorney. They will give you, the partners, a helping hand with the paperwork and advice you on which state is the most suitable for you to carry out the activities of your partnership venture successfully and draw an operating agreement for you. Employing the services of an attorney usually means that they will assume the role of a person of records. Their task will also involve receiving any official notice from the government and helping in the handling of any official paperwork necessary in the registration process. The attorney will help you maintain some degree of anonymity with regard to the specific details of the registration.
The other approach partners can take is to employ the services of an online legal advisor who is well-respected and well informed about the registration of limited companies. This method can be effective, but it takes on a general approach that is not tailored to your specific situation. Partners have to be careful when taking this approach to get everything right as any mistake can prove to be costly to the partnership regarding cost, challenges, and conflict among the partners.
Besides these two approaches, any individual party in the partnership can handle the establishment of the venture if they are aware of the process of establishing limited partnerships.
Even after successfully establishing the partnership and receiving a certificate of limited partnership, you can apply for Employee Identification Number and Tax Identification Number from the IRS which will act as the business’s Social Security Number. With this, you can now establish a brokerage account, open a bank account, access commercial loans, acquire real estate property and other perform any other operations necessary for the successful running of the business.
If you are the general partner, you have to be careful not to sell the partnership interest to outside investors without consulting an attorney. This is because limited partnership interests are usually regarded as securities, and there are strict laws applicable that one has to comply with.
Advantages of Limited Partnerships
Limited partnerships have advantages that are similar to other forms of partnership. While limiting their liability, the partners are still able to participate in the growth of the business while enjoying part of the profits. Also, the general partner can take charge of the management of the business.
A major disadvantage with the limited liability, however, is that the general partner is the one to bear all the legal liabilities of the business.