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

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.