What is a Limited Partnership (LP)?

What is a limited partnership (LP)

What is a limited partnership?

A limited partnership is a legal partnership structure that is formed by at least two persons where one is a general partner and one is a limited partner. The limited partnership is known as LP. There can be more than two partners but it is the requirement by the law that there must be at least two partners in the LP. 

A partner who manages the daily operations and working of the LP on a daily basis is known as a general partner. These types of partners are liable for the legal and financial debts of the LP or company. On the other hand, the limited partners are silent partners who invest their money or property in LP but they do not possess any rights to run the business and they do not take part in the business daily. Limited partners are not personally liable for the debt of the company. They are just liable upto their shares in the firm. 

There are many types of business that can be taken in an LP. Such businesses are:

  • Family businesses

Many family businesses are run by one or two general members of the family and the rest members of the family are limited partners who just invested the money in the family business.

  • Real estate business

In the real estate businesses, the limited partner invests their money or property and general partners use this money to take projects and build malls and apartments. Limited partners enjoy the profit without doing any work.

  • Film production companies

The director of the film is known as a general partner in the film production company. A person who is investing his money to build the movie but does not take any daily work for the completion of the movie is a limited partner.

  • Professional services company

These types of companies do not need many partners to run the company or firm. The limited partners just invest their money in the firm and the rest work is run by the general partner.

Liabilities in the limited partnership (LP)

Normally the general partner of the LP form holds the liability to pay the financial debts of the company. It means if the business of the firm is unable to pay the debts of the firm or get sued by a third party, the general partner of the firm will be liable to pay these debts by selling his personal assets like house and savings accounts etc.

The limited partners in an LP are limited to their investment in the firm.

Management of limited partnership (LP)

The LP is managed by the general partners of the partnership firm only. The business of the firm is handled by the general partners. They manage the daily affairs of the company and make necessary decisions which are suitable for the working of the company or firm.

On the other hand, the limited partners in the business of partnership remain silent. Generally, they do not have any right to make daily decisions in the business of the firm. But if it is written in the partnership deed, then they may get some rights in the business of the partnership. 

Advantages and disadvantages of limited partnership

There are many advantages and disadvantages of an LP which are given below:

Advantages of limited partnership

  • Protection to the personal assets of limited partners

The general partners in an LP are personally liable for the legal and financial debts of the firm. If any loss occurs to the partnership firm, they will have to pay these losses by selling their personal assets. But in the case of limited partners, they are not personally liable to pay the debts of the partnership firm. If the LP took any losses, they will just lose their financial investment only which is invested by them to run the business of the firm. Their personal assets like house property and bank accounts are not liable to pay debts.

  • No confliction in the management

The limited partnership is managed by general partners only. The limited partners in the LP do not interfere in the business of the LP. The partnership deed specifies the rights and duties of all the partners and profit and loss distribution also. It also provides that only the general partners have the right to make the decisions every day.

  • Simple to form

It is very easy to form a limited partnership as compared to the formation of a company. The limited partnership does not require any board of directors.

  • No problem with the capital investment

The partners in the limited partnership can add more partners to the firm if they need more capital to run the business of the firm. They can add the investors as limited partners.

Because the investors who are investing their money in the LP know that they will be limited liable in the partnership firm if the LP takes any losses.

  • Benefit related to tax

The partners of the partnership firm pay taxes on their share in the company’s profit. It means, it lowers the burden of tax by distributing the tax between the partners of the LP.

  • Easy to transfer the partnership

Limited partners can leave the firm or can be replaced. The limited partnership does not need any public notice while removing the limited partner from the partnership firm.

Disadvantages of limited partnership

  • All partners do not have personal liability protection

The limited liability partners are not liable to pay the debts of the company by selling their personal properties. But it is not the same in the case with general partners, they are personally liable to repay the debts of the company.

  • Risk to loss the limited liability

The limited partners must stop themselves from getting involved in the business of the company because it may lead to losing their limited liability status and they can become personally liable for the debts of the business.

These are some advantages and disadvantages of the limited partnership. You should take care of yourself while entering into a limited partnership with limited liabilities.

Formation of the limited partnership (LP)

The limited partnership is governed by the uniform limited partnership act which was amended in 2013. To validate the limited partnership, it must be registered with the secretary of the state.  the person should obtain the licence and permits for the business while applying for the LP.

Conclusion

A limited partnership is known as LP and it is a partnership in which two partners enter into a legal contract to run the business of the firm. These two partners are different from each other. The main is known as a general partner and the second is known as a limited partner.

The general partner is the partner who is managing the business of the company and the limited partners just invest their money in the business of the firm.

A limited partner is not personally liable for the debts and legal issues of the firm.


You can follow us on Instagram and Linkedin to get notifications of new articles published by Legal Study Material.

Leave a Reply

X
%d bloggers like this: