This particular entity has basically the same attributes as a General Partnership except for one very important distinction:
It has Limited Partners who usually do not have liability for business management responsibilities.
Those responsibilities generally fall on the General Partner of the Limited Partnership. The responsibilities and functions are usually outlined in a partnership agreement. However, the Limited Partner does not have total limited liability. They are subject to liability in the amount that they have invested in the Limited Partnership.
The Limited Partnership can be a great tool if done properly. Too often people enter into casual partnerships without taking liability into consideration.
For example, if you have a “partner” involved in a business venture with you and either they or one of their employees cause an accident that brings about a lawsuit, your assets could be at risk.
One Common Mistake
Limited Partnerships have been a popular use as an asset protection device. One of the most common mistakes made is having a person as the General Partner. They are then held totally liable, whereas, if a properly structured corporation were used as the General Partner, they have the additional liability protection offered through the corporation.
Some of the additional advantages of using a Limited Partnership are:
- It has been a useful tool for estate planning (Family Limited Partnerships)
- Has just one level of taxation
- The interests of the Limited Partner are not easily attachable by creditors and rarely can be seized or subject to a forced sale
Some of the disadvantages are:
- Can be very complicated and expensive to form and properly maintain
- General Partners have unlimited liability (this can be reduced of properly structured)
- Not impenetrable- in certain circumstances protection can be lost
- If the partnership agreement is not done properly, it may be less effective
Additional note: Due to the characteristics of an LLC, they have widely replaced the use of LPs when it comes to business partnerships.