What is Limited Partnership - LP
A limited partnership exists when two or more partners unite to conduct a business in which one or more of the partners is liable only to the extent of the amount of money that partner has invested. Limited partners do not receive dividends but enjoy direct access to the flow of income and expenses. Some may also call this a limited liability partnership. The main advantage to this structure is the owners are typically not liable for the company's debts.
BREAKING DOWN Limited Partnership - LP
Generally, a partnership is a business owned by two or more individuals. There are three forms of partnerships: general partnership, joint venture and limited partnership. The three forms differ in various aspects, but they share similar features.
Similarities of Limited Partnership With Other Forms of Partnerships
In all forms of partnerships, each partner must contribute resources such as property, money, skill or labor to share in the business's profits and losses. At least one partner takes part in making decisions regarding the business's day-to-day affairs.
Though not a legal requirement, all partnerships require an agreement that specifies how to make business decisions. These decisions include how to split profits or losses, resolve conflicts and alter ownership structure, and how to close the business, if necessary.
Differences Between Limited Partnership and Other Forms of Partnership
A general partnership is the one in which all partners share in the profits, managerial responsibilities and liability for debts equally. If they plan to share profits or losses unequally, they should document this in a legal partnership agreement to avoid future disputes. A joint venture is a general partnership that remains valid until the completion of a project or a certain period elapses.
A limited partnership differs from other partnerships in that the partners can have limited liability. This means limited partners are only liable for business debts up to their initial investment. The general partners are those responsible for the day-to-day management of the limited partnership and are liable for the company's financial obligations, including debts and litigation. Other contributors, known as limited or silent partners, provide capital but cannot make managerial decisions and are not responsible for any debts beyond their initial investments.
Formation of Limited Partnership
Almost all U.S. states govern the formation of limited partnerships under the Uniform Limited Partnership Act, which was amended in 1985. It was originally known as the Limited Partnership Act, which was created in 1916 and adopted by 49 states, plus the District of Columbia.
To form a limited partnership, the partners must register the venture in the applicable state, typically through the office of the local Secretary of State. It is important to obtain all relevant business permits and licenses, which vary based on locality, state or industry. The U.S. Small Business Administration lists down all local, state and federal permits and licenses necessary to start a business.