A limited partnership (LP) is similar to a general partnership while still offering limited liability protection to some of the partners. In an LP, at least one partner must be a general partner with unlimited liability, and at least one partner must be a limited partner whose liability is limited to the amount of his or her investment. Limited partners act as “silent partners” making a capital investment much like passive shareholders in a publicly traded corporation but having no involvement in the management decisions of the business.
An LP allows for pass-through taxation, as its income is not taxed at the entity level. Limited partners can use losses to offset other passive income on their tax returns. General partners losses can be used to shelter other income up to the value of their investment in the partnership since their losses are not usually considered passive. The LP organization is especially appealing to types of businesses where a single, limited-term project is the focus such as real estate or the film industry. LPs can also be used as a form of estate planning.
Advantages of a Limited Partnership
- LPs allow for pass-through taxation.
- Limited partners are not held personally responsible for the debts and liabilities of the business.
- Provides additional sources of investment capital.
- The general partner(s) have full control over all business decisions.
- Partners have more flexibility in structuring the management with less formal requirements and annual paperwork.
To create an LP the proper formation documents must be filed with the appropriate state agency and the necessary state filing fees paid.