Advantages and Disadvantages of Limited Partnerships

A limited partnership differs from a general partnership in the role and responsibilities taken by the partners. Limited partners provide capital and help arrange financing while not taking an active role in running the business. They do, however, receive a share of the profits for their involvement.

Most states have statutes that regulate and define the obligations and responsibilities of partners in this type of business arrangement. You are required to file with your Secretary of State, and must also file various reports.

The key to this partnership agreement can be found in the area of liability, which falls on the general partners, not on the limited partners. For this reason, some individuals are reluctant to be general partners. The general partner of a limited partnership can itself be a corporation or LLC, to mitigate liability issues to the promoters of the limited partnership. This, however, does not mean that a limited partner cannot be part of, or have a vote in, major decisions that affect the partnership.

A limited partnership can be attractive for a limited partner who can provide funding but not expertise, and does not have the time to devote to being a hands-on part of the business. Taking on the financial risk of his or her investment, but not the liability risk, is also more attractive to a limited partner.

For tax purposes, a limited partnership works like a general partnership, in that it is a pass-through operation with profits passing through to the partners, who then include their allocated income on their personal tax returns. Limited partnerships are often formed to acquire, operate, and hold real estate.

Advantages of a Limited Partnership:

• It is easier to attract investors as limited partners.
• This arrangement allows for general partners to use their expertise, make key decisions, and manage the business.
• Limited partners can leave the business or be replaced, without the need for the limited partnership to be dissolved.

Disadvantages of a Limited Partnership:

• There are more filings, formalities, and state requirements with limited partnerships.
• General partners assume personal liability.

An interesting aspect of the limited partnership is that partners are able to allocate profits, losses, and gains as they see fit, regardless of the equity interest of a specific partner; subject to compliance with tax laws. This, too, can be attractive to prospective investors.