A limited partnership is a type of partnership in which at the minimum one of the owners of a business is a limited partner and at least one of the other partners has limited liability, that is, he/she is a limited partner. Unlike general partners who are involved in every aspect of the business from making day to day business decisions to being personally responsible for all the debts of the business, limited partners are just investors in the business venture and therefore have very little to no influence at all on the everyday operations of the business.
Example of Limited partnership
A doctor is earning a lot of money in his practice. He wants to start an Electronics showroom but he does not have the time. However, the doctor’s friend knows everything about the electronics industry but he does not have the money. Thus, the Doctor becomes a limited partner in a firm where his only job is the investment.He is also responsible for the debt of the firm upto an amount.
But the managerial aspects and all other responsibilities lie with the partner who knows electronics and who is going to actually manage the showroom. This 2nd partner is known as the general partner. The one with limited involvement in the firm is known as the limited partner. Thus, it is a win-win situation for both and accountancy wise they both have become partners as well, gaining the benefits of a limited partnership.
Features of a Limited Partnership
The following are the main features identifying a limited partnership:
- In a limited partnership, there exist two types of shares, that is, limited partner and a general partner. There should be at least one partner whose liability is limited, that is, a limited partner and at least one partner whose liability is unlimited, that is, a general partner.
- A limited partner is essentially an investor, he/she invests in the business but is not active in the running of the business. Day to day running of the business is the responsibility of the general partner. However, the limited partner is allowed to inspect the accounting books.
- The actions of a limited partner are in no way binding to the rest of the partners or the business itself. Their actions, unlike general partners, are considered to be their own and not representative of the interests of the company.
- For a partnership to be considered a limited partnership, it has to be registered according to the laws of the state in which the business will be operating. Non-registration of a partnership will lead to the partnership being considered to be a general partnership.
- A limited partner is not allowed to withdraw the capital he/she invested in the business, neither in part or in whole. If he/she withdraws any amount of the capital invested, then he/she makes his/her liability unlimited to the tune of the withdrawn amount.
- Another feature of a limited partnership is that the limited partner has to make his/her investment in cash, that is, he/she has to bring the capital to be invested in the form of cash.
- Another feature is that the partnership is a legal entity on its own therefore separating it from the partners. Two or more people carrying out a profit making business and have the business registered makes the business a partnership. It should be noted that the succession of limited liability partnerships is perpetual.
- It is the obligation of every limited liability partnership to maintain their accounts annually in a manner that reflects the true state of affairs of the partnership. The business must file solvency and their statement of accounts at the end of every year with the registrar. All accounts under the partnership must also be audited according to the audit laws of the state in which the business is operating.
Advantages of a Limited Partnership
Some of the advantages of a limited partnership include the following:
- Tax benefits: Limited partners get a share of the profits as well as the losses of the business but an advantage to them is that they do not have the responsibility of running the operations of the business on a day to day basis like the general partners. Personal income of all the partners is taxed but a limited partner has lesser liability and responsibility compared to a general partner.
- Liability limits: The liability of a limited partner for a debt owed by the partnership is only limited to the level of the partner’s investment in the business.
- No turnover issues: A partnership will remain intact and in operation even if a limited partner decides to leave or is replaced by another partner. There is no need to dissolve the partnership.
- Less paperwork: Creation of limited partnerships just like general partnerships do not require bulky paperwork, very little paperwork is required as opposed to creating a corporation. It is, however, essential to file the partnership agreement with the state where the business operates.
- Investment opportunities: A great way of offering investors the chance to share in the profits and losses made by the company without actually involving them in the daily operations of the business is through a limited partnership.
- General partners are in charge: Limited partners do not need to involve themselves in the running of the business, general partners run the business and do not need to consult with the limited partners in order to make a business decision.
Disadvantages of a Limited Partnership
Disadvantages of a limited partnership are as outlined and discussed below:
- General partners are at risk: General partners bear all the risk associated with the business including all its debts and other obligations. In the event that the business is sued or becomes bankrupt, the general partner takes responsibility for all the liabilities and debts of the business. General partners also have the ability to make decisions affecting the business and as such, they have to own and take responsibility for these decisions in case something goes wrong.
- Compliance challenges: Compared to corporations, partnerships require less paperwork but because of the limited partners, who are also investors in the business, annual meetings must be held and creation of a partnership agreement that is detailed is mandatory.
- Partnership life: In the event that a general partner dies, the business may dissolve unless the other partners make an agreement that the company will continue operating.
A limited partnership has several similarities to a general partnership save for some distinct differences. The main difference is that a limited partnership has two types of partners, that is, the general partner who runs the business and a limited partner who is essentially an investor in the business. A limited partnership is a sure way of getting investors to share in the profits and losses of the business without actually getting them involved in the running of the business.