Limited Partnership Agreement
A limited partnership agreement is a legal arrangement between at least two business partners. Most limited partnerships are forged to infuse capital or funding into a company. The limited partner in the business endeavor has limited liability and is generally confined to the amount of the investment he/she put into the company. The LP agrees to offer a certain amount of funds and agrees to accept a pre-stated share of the business profits.
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LImited vs. General Partnership
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There are three main differences between a limited partnership and a general partnership. First, a limited partnership is technically created by law, by statute, not by the contracts of the partners. This means there is a legal commitment that is mandated by state law. Second, in a limited partnership there is the ability to override the agreement, generally giving the limited partner more power than the statue may imply, as long as the general partner agrees. For example, the general partner may take on management responsibilities, but that can be overridden by agreement. Third, a limited partnership means there is the benefit of pass-through taxation, so as not to be taxed as a corporation.
Setting Up the Partnership
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The first step is to decide which state the partnership is going to be organized within. This is usually determined by where the partners reside or where the company does most of its business. Second, decide whether or not to hire an attorney to secure the partnership. Although working with an attorney is advised, there are several online programs and forms available that will help business owners set up limited partnerships. Third, choose a name for the partnership. Do a trademark search to be sure someone else is not using the name chosen. Finally, determine the investment percentages of the partners involved.
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Taxation
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In a limited partnership arrangement, income can be distributed to partners in a way that minimizes the tax liability. If the agreement meets certain criteria related to management and ownership transfer, partners fall under the legal parameters of pass-through taxation, which generally avoids dividend taxation. This means the partners pay the taxes on their individual shares of the profits, rather than pay taxes on the partnership itself.
Transfer
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Limited partner interest in a company can be transferred to a third party, but general partners and other limited partners in the agreement have first right of refusal. This provision in mandated by law. There are also what are called family limited partnerships, which are set up so only family members may be the beneficiaries of a partnership transfer. This is to ensure that a family business stays within the family. Disclosure laws, in general, are not as stringent for limited partnership transfers as they may be for other business transfer agreements.
Dissolving a Partnership
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In a general partnership, if someone leaves or withdraws from the partnership, the agreement legally dissolves. However, in a limited partnership the rules are different. Since the limited partner generally is not involved in the formal management of the business, leaving his role does not mean the partnership agreement is completely disbanded. If there are other partners, the agreement between them still stands, although new agreements pertaining to investment percentages may have to be renegotiated. A limited partnership can also be dissolved if the general partner dies or retires, or if he withdraws as general partner, unless the agreement states otherwise.
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