Investment: Limited Partnerships
Often referred to as LPs, the partnership can be created by two or more individuals or entities. There must be at least one general partner and one limited partner. Unlimited personal responsibility lies on the general partner; however, a corporation or LLC can be the general partner, thus limiting the personal liability. The limited partner is only held liable for the amount invested in the company, which is the primary benefit. Typically an investor chooses to be a limited partner. An LP is taxed as a flow-through entity.
Limited partners need to remain limited in duties. The limited partner usually has little to no managerial duties. If the limited partner has the ability to perform such acts, then he may be considered a general partner that is personally liable. An LP can be a member of the Board of Directors and still be considered limited in duties.
In most states, the limited partnership can elect to be a Limited Liability Company making it a limited liability limited partnership. The LLP partners remain responsible for their share of any debt (equivalent to their amount of investment), but are not accountable for malpractice or any other wrongdoings that other partners might engage in during the operation of the company.
To retain status as an LP, the paperwork needs to be kept current with the state. If it lapses, legally a limited partner can be considered a general partner, thus personally liable for debt and malpractice for the entire business.
All examples are for educational purposes only, and should NOT be construed as investment advice. Always contact a qualified tax attorney or advisor prior to making any financial decision.
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