21 Oct Why Should You Form a Limited Partnership?
By: Barry E. Haimo, Esq.
October 27, 2016
Why Should You Form a Limited Partnership?
If you are thinking about starting a partnership, you generally have two options: a general partnership and a limited partnership.
General partnerships allow two or more partners to operate a company and, unless otherwise agreed, split profits and losses equally. A limited partnership (LP) is a unique business entity that allows for multiple investors, but a centralized decision making process and limited liability for many partners in the company.
If you are trying to decide which entity you should use for your new business endeavor, consider the advantages of forming a limited partnership:
Setting Up a Limited Partnership Is Easy to Do
Forming a limited partnership is just as easy as forming a corporation or an LLC (it’s just more expensive). You should may want to create and file a trade name with the state of Florida and protect it federally and state wide; you should create and sign a partnership agreement, and obtain an employer identification number (sometimes referred to as a tax identification number). Depending on the nature of the limited partnership, you may have to apply for other licenses or permits, but your basic limited partnership just needs to fill out a few forms to be recognized by our state.
Adding More Limited Partners Doesn’t Affect Who Makes Decisions
If you want to be able to add on partners easily, but still maintain control, a limited partnership may be the route for you. Like nonvoting LLC interests or nonvoting shares of stock in a corporation, limited partners in a limited partnership are not personally liable for the business’s losses and debts. They are only liable for what they invested in the limited partnership. Additionally, limited partners do not have a say in the limited partnership’s decision-making process. This equates to truly being a passive investment.
This often means that the business is run more smoothly, because decisions are more centralized like a corporation so they can be made quicker. However, because there are more partners, those decisions also tend to be implemented and carried out faster. It’s a win-win.
If a limited partner decides to leave the limited partnership, that can be done easily too. The limited partnership will be affected, but not to the point where it will be dissolved. These partners can also be easily replaced.
Limited Partners Hold Limited Liability
General partners (who run a limited partnership) can easily present the limited partnership to potential limited partners as a great investment opportunity that does not require too much work.
If you want to invest in a company, but do not want to be held personally liable for the shortcomings or debts, you can invest as a limited partner and watch the benefits flow in without day-to-day work.
Income Tax Benefits for Limited Partners
Partners in an limited partnership are all taxed on their personal income tax returns, and the profits and losses flow through the business straight to the partners. This means that limited partners are still able to reap the benefits of the limited partnership’s profits, but are not active participants in the management of the limited partnership.
Estate and Gift Tax Benefits to Limited Partners
If structured properly, partners in a limited partnership also enjoy discounts for lack of marketability and their minority interest; after all, if they cannot sell the interest and they do not control it, the value of their shares should appropriately be discounted.
The advantages and distinctions of a limited partnership may fit your business goals and allow you to hold the role you want in your business. If this is an option you would like to pursue, consult a Florida business planning attorney and take the first steps into setting up your new business today.
Barry E. Haimo, Esq.