Limited Partnership: Is It Good for Your Small Business? – NerdWallet

Choosing your legal structure is one of the first things you ’ ll do as a newfangled small-business owner. Among the different types of clientele structures, a limited partnership is an choice that gives you a manner to raise money from a cheeseparing group of investors, but is normally a beneficial choice in entirely a few circumstances.

Overview of limited partnerships

The definition of a limit partnership is a commercial enterprise with more than one owner, including at least one general partner and at least one limited collaborator. The cosmopolitan partner is in commit, making clientele decisions and taking personal responsibility for the business ’ s debts and lawsuits. circumscribed partners are just investors in the occupation ; they don ’ t have control of daily operations, and they ’ re only liable for angstrom much as they invest in the company. If specify partners do take on an active function in running the business, they can lose their limited liability and can be held fully responsible for the occupation ’ randomness debts and lawsuits, much like the general spouse.

note : Don ’ thyroxine confuse limited partnerships with circumscribed liability partnerships ( LLPs ) ; they ’ ra two different business structures. Unlike general partnerships and LLPs, limited partnerships aren ’ deoxythymidine monophosphate typically used to structure actively run businesses. rather, they ’ re often used in kin estate planning and as investment vehicles, peculiarly in the commercial real estate and film industries. When used for raising investments, the restrict partners function much like stockholders investing in a public company, only standing to lose the money they invest. They ’ re considered passive investors because they contribute money to the partnership but don ’ t have control over decisions. Limited partnerships, by definition, are besides more complicated to set up than general partnerships, which form automatically when two partners go into clientele together. To form a limited partnership, you have to register in your country, pay a filing fee and create a express partnership agreement, which defines how much ownership each limited spouse has in your company, and other terms of the partnership. You can consider forming a limited partnership if you ’ re starting a clientele on your own and have friends or family members matter to in investing money but not in helping you run the business. You should consider a different structure, such as an LLP, limited indebtedness company ( LLC ), or pot, if you ’ re not looking to raise investments, or you want to run your business with a partner who has equal control of the caller.

Advantages of limited partnerships

  • They ’ re a good room to raise investments. A limited partnership is one way to raise inauguration or expansion capital for your occupation. As the general spouse, you can gather investments from family members and friends but still maintain entire manipulate of the caller .

Disadvantages of limited partnerships

  • general partners have complete indebtedness. As with sole proprietorships and general partnerships, as a general partner you assume entire province for the business ’ south debts and lawsuits. For example, if your occupation gets sued, your personal assets, including your home and car, are at interest .
  • They ’ re not conducive to actually running a businesses. Limited partnerships are structured well for raising investments, particularly in the real estate of the realm industry. however, they ’ re not well suited for running an active commercial enterprise, as the limited partners aren ’ thymine allowed to participate in running or managing the business. In most cases, if you ’ re looking to open a business, it will make more smell to form an LLP, an LLC or a corporation .
  • limited partnership interests are considered securities. Since restrict partners are passive investors in the partnership, their shares are considered securities and are submit to securities rule by the federal and submit government .

Should you form a limited partnership?

Consider forming a restrict partnership if you want to raise capital for your business from a minor group of investors, specially kin, friends or people in your community. You ’ ll be able to maintain full master of the commercial enterprise while gathering das kapital from passive investors who have limited liability. For most businesses, a limited partnership international relations and security network ’ t the best option because the general partners have a big measure of personal liability and limited partners can ’ triiodothyronine enter in running the ship’s company. rather, consider forming an LLP, an LLC or a corporation. Don ’ t form a limit partnership if :

  • There are multiple owners who all want to have control of occupation decisions. A limited partnership needs at least one restrict spouse who is very well with investing in the company but not managing the business .
  • You don ’ t need to raise capital. Limited partnerships are most useful when it comes to raising investments. If you have a occupation loan or can operate without an outside beginning of fund, there ’ s no need to form a limited partnership.

How to form a limited partnership

If you decide to form a limited partnership, spill the beans with an lawyer and accountant before you spend money and meter setting it up. even if you ’ ve done your research, these professionals can provide advice that ’ s specific to your business, and either affirm that you ’ re making the right decision or suggest a different commercial enterprise structure that could be more beneficial for you. Registering a limited partnership differs by state, but typically you ’ ll do the following :

  1. Decide what submit to read in. The requirements for forming a limited partnership vary by state, and some states offer more advantages than others. Find information about particular state file requirements on the Register With State Agencies page of the U.S. Small Business Administration web site. You can besides consult an lawyer to get more information about what state is best for your commercial enterprise based on state occupation laws and tax codes .
  2. read with the state you choose. To form a limited partnership, you must file with your state means, normally the secretary of state ’ south office, and pay a filing tip, which varies by state. For case, in Delaware, one of the most common states in which to incorporate a business, it costs $ 200 to file for a certificate of limited partnership. Your application will ask for the name of your occupation, and many states require the name to include the terms “ limited partnership ” or “ LP. ”
  3. Create a restrict partnership agreement. A limited partnership agreement is a legal document that outlines your character as the general spouse and the roles of the limited partners. The agreement should describe how profits and losses will be divided among partners, how partners can leave the partnership and how the partnership can be dissolved. You can consult an lawyer to help you create this agreement, or you can write one yourself using an on-line template .
  4. Get the proper licenses and permits for your clientele. If you ’ re using a restrict partnership as a commercial enterprise social organization, you ’ ll need certain licenses and permits to legally operate, depending on your state, vicinity and industry. Use the SBA Business Licenses and Permits search cock to find links to the relevant paperwork you ’ ll need .

File income taxes as a limited partnership

As with general partnerships, your limited partnership doesn ’ t file income taxes at the business horizontal surface. Taxes “ passing through ” the business to you and the other general and express partners. Your circumscribed partnership still has to file an annual information return ( Form 1065 ) to report its income, deductions, gains and losses to the IRS. Your partnership besides must file a Schedule K-1 for each of the general and limit partners to document how much of the business ’ s income and losses each spouse is responsible for. You and the early partners must include your portions of the partnership ’ second gains and losses on your individual tax returns.

Top states for limited partnerships

The costs and requirements of registering a limit partnership differ by submit. Home state of matter internalization is when you form a limited partnership in the state your clientele operates in. however, you might benefit by setting up your specify partnership in a express early than the one you operate in. If you do this, you must file for foreign reservation to legally operate in your country. Delaware and Nevada are broadly considered the most advantageous states in which to incorporate due to their business-friendly laws and tax codes. however, it can be helpful to consult an accountant or lawyer to help you decide the state that ’ s best for your business.

Next steps

If you decide a limited partnership is the right structure for your business, the adjacent step is to register your commercial enterprise with your state and begin drafting your limit partnership agreement.

If you ’ re inactive hesitant about how to structure your business, read about your early options, including sole proprietorship, general partnership, LLP, LLC and pot. It ’ randomness besides a good idea to talk to an lawyer, accountant or a fiscal adviser to double-check that the structure you choose is the best option for your business.

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