Why choose a limited partnership?
A limited partnership (LP) is similar to a general business partnership while still offering limited liability protection to some of the partners. In a limited partnership, at least one partner must be a general partner with unlimited liability, and at least one partner must be a limited partner whose liability is limited to the amount of his or her investment. Limited partners act as “silent partners” making a capital investment much like passive shareholders in a publicly traded corporation but having no involvement in the management decisions of the business.
A limited partnership allows for pass-through taxation, as its income is not taxed at the business level. Income or losses are reported on the partners’ tax returns and any tax due is paid at the individual level. Limited partners can use losses to offset other passive income on their tax returns. General partners’ losses can be used to shelter other income up to the value of their investment in the partnership, since their losses are not usually considered passive.
Advantages of a limited partnership
Limited partnerships are especially appealing to a business partnership where a single, limited-term project is the focus—such as the film industry, real estate or estate planning. Advantages of a limited partnership typically include:
- Limited liability protection. Limited partners are not typically held responsible for business debts and liabilities.
- Pass-through taxation. Income tax is not paid by the business. Profits/losses are reported on the partners’ tax returns, and any tax due is paid at the individual level.
- Control over day-to-day operations. General partners in the limited partnership have full control over all business decisions.
- Flexible management. Partners have more flexibility in management structure.
- Fewer formal requirements. Limited partnerships face fewer formal requirements and paperwork than corporations.
- Additional source of investment capital. Adding limited partners provides additional sources of investment capital without losing control, as with a business partnership.
How are limited partnerships formed?
In order to register a company as a limited partnership, formation documents must be filed with the appropriate state agency and applicable filing fees paid.