Limited Partnerships
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Limited partnerships are organized to move the joint and several liability from investors (limited partners) to the manager of the partnership, the general partner. In modern business, the traditional partnership is fraught with legal risk.
Definition
A limited partnership1 must have at least one general partner and one limited partner. The general partner manages the partnership and assumes personal liability for the obligations of the partnership. The limited partner is passive in management and assumes limited personal liability.
A limited partnership (LP) is a type of legal entity2 created by state law3
Reason to Form a Limited Partnership
Limited partnerships were popular in real estate intensive businesses in the 1980’s. LPs provided highly tax efficient investment for limited partners.4
LPs are designed to provide passive income to investors. They are not used for actively managed businesses.
Basic information
After you form a limited partnership, you must maintain it to keep it in compliance. Track the following information for a limited partnership:
- Legal name is the registered name of the limited partnership. If the state requires registration of the limited partnership, then it is.
- Address should be the principal place of business.
- Registered Agent or legal address is the place where you receive service of process.
- Website is not legally required but is part of standard contact information.
- Email is not legally required but is part of standard contact information.
- Phone is not legally required but is part of standard contact information.
- Place of Organization is the legal jurisdiction where the partnership is organized.
- General Partner is the person or legal entity which serves the role of general partner.
- Tax Status is pass-through, unless there is an applicable exception.
Documents and filings
This table summarizes the types of partnership documents and filings:
| Type | Timing5 | Expiration6 |
|---|---|---|
| Organizational filings | at formation | No |
| Partnership agreement | at formation | No |
| Minutes | ongoing | No |
| Insurance | ongoing | Yes |
| Filings | ongoing | Yes |
| Partnership tax returns | ongoing | No |
| K-1s7 | ongoing | Yes |
| Capital account | at formation | No |
| Other | ongoing | Yes |
Officers and directors
Management and ownership structures depend on the partnership agreement, type of partnership, and state law.
The general partner provides the governance and management function. Limited partners might, however, have some voting rights. Alternatively, partnership agreement might spell out a separate governance function.
Since people can serve more than one role, it is important to list roles and who serves those roles. It is helpful to track terms of service for each role and person.
Here is the information to track for officers and directors:
- Type of Role: officer, director, or other (consultant, lawyer, accountant, or auditor)
- Title: chair, director, President and CEO, Treasurer, Secretary, etc.
- Name: first and last name
- Start Date (term of service): date of appointment
- End Date (term of service): date appointment ends
Please note that a person can have two different roles with different terms of service.
Ownership
The managing partner is called the “General Partner”. Owners who are not the general partner are “Limited Partners”. Ownership interests are called “partnership interests”.
You should capture the name of the owner and the percentage of ownership at a minimum.
Conclusion
To preserve the benefits of your legal entity, effective ongoing maintenance is critical.
Many states have adopted the Uniform Partnership Act. ↩︎
Exceptions apply ↩︎
Exceptions apply ↩︎