How to Set Up a Limited Partnership for Real Estate

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Real estate investing is risky, entails high operational costs and carries the potential for huge losses. One way of gathering capital and hedging risk is to create a limited partnership to hold business assets. Forming a partnership allows you to pool the assets of many investors, and limiting the liability of partners encourages investment in the partnership. Limited partnerships also confer tax advantages because the IRS does not tax partnerships as separate entities and because limited partners do not have to pay self-employment tax.

Things You'll Need

  • Certificate of Limited Partnership
  • Filing fee
  • Select a name of your partnership, and perform a name-availability search on the website of your state's secretary of state to make sure the name is not already in use. The name should include a suffix such as "Ltd." or "L.P.," indicating its limited liability status. Some states require partnerships to use the last names of each partner.

  • Download a Certificate of Limited Partnership form -- or its equivalent in your state -- from the website of your state's secretary of state.

  • Identify at least one general partner, a registered agent to receive official communications on behalf of the partnership and an official office address for the partnership. Although the general partner faces unlimited liability, in many states a corporation or limited liability company can serve as the sole general partner, effectively eliminating unlimited personal liability for partnership debts.

  • Create a partnership agreement that details voting rights, management authority, ownership shares, distribution rights, transfer of shares, changes in membership and amendment of the agreement. Research state law to ensure that the terms of the agreement comply with legal requirements. The rules for the transfer of shares must comply with the Securities and Exchange Commission's Regulation D. Have all partners sign the agreement. No state requires limited partnerships to file copies of their partnership agreement.

  • Complete the Certificate of Partnership form. You must supply the name of the partnership, its official office address, the name of the registered agent and the name of the general partner(s). You don't have to list the names of any of the limited partners. The general partner(s) must sign and date this form.

  • Submit the Certificate of Partnership to your state's secretary of state, together with the required filing fee. Most states allow you to file and pay online.

  • Purchase real estate in the name of the partnership, not any of the partners. If a general partner purchases real estate in his own name, he cannot share liability for the debt with the partnership or any of the limited partners. Even limited partners can be held personally liable if they purchase assets or guarantee debts in their own names. Consequently, individual partner signatures on purchase agreements should clearly indicate that the partner is signing as a representative of the partnership, not in his personal capacity.

Tips & Warnings

  • Limited partners can lose limited liability by taking an active role in the day-to-day management of partnership affairs.

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References

  • Photo Credit Comstock Images/Comstock/Getty Images
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