Business, Legal & Accounting Glossary
A business organization where the individual partners have varying degrees of input and control over decisions, profit-sharing, and risk, usually related to the amount of money each partner has invested.
A business structure that allows one or more partners (called limited partners) to enjoy limited personal liability for partnership debts while another partner or partners (called general partners) have unlimited personal liability. The key difference between a general and limited partner concerns management decision making–general partners run the business, and limited partners, who are usually passive investors, are not allowed to make day-to-day business decisions. If they do, they risk being treated as general partners with unlimited personal liability.
A special type of partnership which is very common when people need funding for a business, or when they are putting together an investment in a real estate development.
A limited partnership requires a written agreement between the business management, who is (are) general partner or partners, and all of the limited partners. Each limited partner makes an investment of funds into the partnership and is supposed to receive a pre-stated share of the profit, which is ordinarily greater than that of each of the general partners up to a point (such as return of the investment), and, thereafter, the limited partners will receive a lesser share than the general partner(s). The limited partners also will receive the tax benefit of a “passed through” loss (a personal income tax deduction for part of the loss) during the development stages of the partnership when the expenses exceed any receipts. Quite often there is also a provision for eventual buy-out of the limited partners by the general partner(s). The limited partners may not participate in the management decisions of the partnership or they will lose their limited partnership status. They do have the power to vote to remove the general partner(s), although usually the partnership agreement is structured so that such removal is virtually impossible unless the general partner in question has committed fraud. Since the limited investors have no control of the conduct over the partnership, they should make sure they have considerable knowledge about the reputation and record of the general partner(s) and the type of business. In fact, state laws require that there be some pre-existing acquaintanceship between the general and the limited partners or a detailed prospectus provided by the general partner(s) meeting very stringent and specific federal requirements of disclosure. The maximum number of limited partners is set by state law to prevent using interests in the limited partnership as if they were shares of stock in a corporation. In addition to priority in profit, tax deductions, and potential share in the success of the enterprise, the limited partner is “limited” in potential loss, since all he/she can lose is his/her investment, and the general partners alone are subject to claims, debts in bankruptcy and lawsuits against the partnership. Limited partnerships must file their name and names and addresses of general partners with the Secretary of State or other designated officer in the state in which the partnership is created so the public can find out who the responsible parties are. Like a corporation, a limited partnership may not have a name which is too similar to another limited partnership or corporation.
Unlike a general partnership, a limited partnership may be a good idea for people who have a restricted cash flow, but who still want to participate in a business venture.
After having been in a limited partnership agreement for ten years, Charles was finally able to buy in as a general partner in the firm.
Limited Partnerships are a form of business organization that combine attributes of corporations with those of partnership. Like corporations they can provide investors with the protection of limited liability. Like partnerships they can give management and the investors flexibility in allocating profits and losses among partners.
The limited partnership, together with the limited liability company, is the structure most frequently used by venture capital firms to raise money. They enable investors to receive the profits and losses generated by the fund’s investment without the intervention of corporate income tax. At the same time, they give investors the flexibility needed to attract competent fund managers by funding their expenses and salaries and providing them with a percentage of profits for incentive. Limited partnerships are also used by young companies to transfer company losses to investors as a method of attracting equity investment (transferring losses reduces the investors’ after-tax cost of providing the equity).
Limited partnerships have two types of partners, general and limited. Limited partners traditionally provide funding to the entity and, by virtue of their limited partnership status, receive limited liability much like that of a corporate shareholder. The general partners do not receive limited liability and customarily manage the business. Limited partners, unlike corporate shareholders, are generally prohibited from becoming involved with the active management of the partnership. If they do become involved, they risk being treated like general partners and becoming personally liable for the actions of the entity.
Limited partnerships must be structured carefully. Obtaining the tax benefits of a limited partnership depends upon close compliance with Internal Revenue Service rules that govern, for tax purposes, the differences between corporations and partnerships. A limited partnership must qualify as a partnership to obtain the special tax treatment.
There are generally four factors the Internal Revenue Service looks at when determining how to tax a limited partnership: 1) unlimited personal liability for the debts of the entity; 2) lack of centralized management; 3) limited duration; and 4) restricted transferability of ownership interest. If a limited partnership meets fewer than two of these standards, it may be characterized and taxed as a corporation. To avoid this result, limited partnership agreements usually try to qualify under criteria (3) and (4) by making the partnership terminate after a specified period of time and restricting the rights of limited partners to transfer their partnership interests. Whenever a limited partnership is used, management should consult with its attorneys and accountants. Only they can insure management of obtaining the desired tax results
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This glossary post was last updated: 30th December, 2021 | 0 Views.