Does a Limited Partnership Need a General Partner?
By definition, a limited partnership, or LP, is a business entity consisting of at least one general partner and one or more limited partners. Whereas an ordinary partnership is not considered a distinct legal entity and all partners are potentially liable for the debts of the partners, the limited partnership allows silent partners to act as investors in the business without exposing themselves to liability for its obligations. LPs are formed under state law but are subject to federal tax laws and regulations.
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General Partners
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A general partner is typically an active manager in the day-to-day business of a partnership, and with good reason: A general partner has personal liability for the debts of the partnership. The general partner is in a position analogous to the managing members of an LLC, except that he has a much greater degree of liability for the partnership's obligations. Unlike a limited partner, a general partner is able to enter into binding contractual obligations on behalf of the partnership.
Limited Partners
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A limited partner is essentially a "silent" partner. The limited partner invests capital into the partnership and is entitled to a share of its profits, but has no additional liability beyond the capital already invested. A limited partner cannot act on behalf of the partnership to form contractual obligations. In a limited partnership, a limited partner generally has no management authority. A limited partner may, however, have the right to vote on and replace general partners.
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Limited Partnerships
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The basic function of a limited partnership is to create a vehicle by which investors can contribute to a partnership without becoming exposed to the liabilities of the business itself. A limited partnership can have employees, in which case it must pay employment taxes. A limited partnership is taxed as a pass-through entity, meaning it is not double-taxed like a corporation. The individual partners are subject to the self-employment tax. The profits paid to limited partners is passive income; therefore, losses can only offset other passive income gains.
Limited Liability Partnerships
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A limited partnership is something distinct from a limited liability partnership, or LLP. In an LLP, there are no general partners; all the partners are limited partners and their liability is limited according to the terms of the particular state law. Generally, partners in an LLP may be liable for debts arising out of their own actions, but are shielded from liability for negligence or incompetence of another partner. Thus, the limited partners in an LLP often have more managerial responsibility than in an LP, but if outside management is hired, this may not necessarily translate into oversight of day-to-day operations. Not every state recognizes LLPs.
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