General Partner:
The General Partner can be an individual, a group of
individuals (a partnership), a separate entity or a partnership of
entities. The General Partner has unlimited liability. If the
General Partner is organized as an entity, it will be exposed to the loss of
assets placed in the General Partnership as well as assets held in the entity
outside the partnership.
Limited Partners:
Limited Partners may also be individuals, partnerships or entities. No
matter what legal form they take, Limited Partners have limited liability
protection from the debts, obligations and liabilities of the Limited
Partnership.
Activities of Limited Partners are
restricted in three major ways. Limited Partners cannot:
-
participate actively in the
management of the business
-
receive or hold as collateral
or security any property of the partnership
-
receive from a general
partner, or the partnership, any money payment or release of liability, if
at that time the partnership assets are insufficient to pay debts (to
outsiders other than the general partner or limited partners)
Unless prohibited by the Limited
Partnership Agreement, Limited Partners may legally compete with the Limited
Partnership, either personally or as members of other businesses.
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limited
partnership formalities |
Meetings:
Generally, there is no requirement for annual meetings of the Limited Partners
and General Partner.
Member Reports:
Limited partners are entitled to call for an accounting or inspect the
financials of the Limited Partnership. However, there is no requirement
that the Limited Partnership issue the Limited Partners an annual report.
State
Formalities: Many states require Limited Partnerships to file annual (in some states
biannual) reports with the state, updating the status of the General Partner,
Limited Partners and the Limited Partnership in general.
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limited
partnership names |
Most states require the following
words or abbreviation to be included in the name of an Limited Partnership:
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names
|
abbreviations
|
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a
(insert state name) Limited Partnership
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L.P.
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Limited Partnerships can do business under
additional fictitious names if they file for a "DBA"
in their state or county. (If you are interested in filing a DBA, please inquire
when placing your order.)
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issuing
limited partnership interests |
Limited Partnership
interests, like stock in a corporation or membership interests in an LLC,
are defined as securities. To issue Limited Partnership interests,
a Limited Partnership must comply with federal and state securities
laws. Generally, an entity must disclose potential risks,
conflicts of interest as well as a variety of other pertinent
information about the entity offering securities in a legal document
known as a Private Placement Memorandum, in order to comply with
securities laws. For entities operating in California, Startup
Legal may be able to help prepare this document. For entities
outside of California, we may be able to assist in finding legal
counsel.
Limited Partnership
agreements can be drafted to pay Limited Partners in a wide variety of
ways. The following is a simple list of options:
| Limited
Partners may receive: |
- a set annual
return (ex: 10%)
-
a
percentage of Limited Partnership profits
-
a
percentage of gross revenue
-
a
percentage of Limited Partnership losses (for tax reasons)
-
a
percentage of revenue, profits or losses from a particular
revenue stream of the Limited Partnership
-
a
percentage of any combination of Limited Partnership revenue,
profits or losses from various revenue streams
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Terms
Available:
-
Defined
for a set number of years
-
Undefined
(or until the end of the partnership)
-
Defined
with an option to extend the term
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tax
implications for the partnership |
Profits from a Limited Partnership
usually pass through to general and limited partners without being taxed
at the entity level. However, a Limited Partnership will have to file an annual report with the IRS stating how much the each
member earned or lost.
In many states, a Limited Partnership
will still be subject to a minimal franchise tax, much like an LLC or S
Corporation.
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tax
implications for partners |
Income received from a limited partnership by either a general
partner or a limited partner must be reported on their individual tax
returns. Income or losses to the general partner is generally regarded as
active income. Income or losses to limited partners is generally regarded
as investment or passive income. According to IRS regulation, passive and
active income must be treated separately.
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