Many start-up business owners would like to take on investors, but do not necessarily want those investors to have a say in running the business.
That creates a difficulty in finding investors that are willing to put their own assets at risk without having a say in how the business is operated. That is where the limited partnership comes in.
Unlike a general partnership, where all of the partners have unlimited liability on the debts of the company, partners in a limited partnership have their liability limited to the registered amount they have invested in the company.
That means that while the investor may lose the entire amount they have invested, creditors and the courts will not be able to go after their personal assets. Regardless of the amount of debt the company runs up, the investors will not be held liable for those debts.
Because the GP is responsible for running the business, they bear the risk for any debts beyond the amount that was invested in the business. Once the investor's money is gone, any outstanding debts are the responsibility of the general partner. If they do not have the ability to pay those debts a bankruptcy court could require that the GP's personal assets be sold to pay off those debts.
When the limited partnership is established there must be at least one general partner (GP). There also needs to be at least one limited partner (LP).
There can be an unlimited number of general and limited partners, but there needs to be at least one of each.
The GP acts as the business agent for the partnership. They are responsible for the management decisions of the business, and any agreements they make with creditors is legally binding.
In exchange for protection from creditors the limited partners give up any say in how the business is operated. There may be some clauses in their agreement that certain financial benchmarks are maintained, but they do not have a say in the day-to-day operation beyond what was agreed to before the limited partnership was established.
Return on Investments
The limited partners are compensated for their investments by receiving a return on their investment in the limited partnership. There is not any established rule on what that payment should be, but it is typically a percentage of the profits from the business. This payment is similar to the dividends that are paid to shareholders in a corporation.
Many times there is a set date when the investment will be repaid to the partner. Once all of the investors have been repaid the company will cease operating as a limited partnership.
It is important to distinguish between a limited partnership and a limited liability partnership (LLP). While a limited partnership was designed to protect investors, an LLP was designed to protect operating partners from the wrongdoings or malpractice of the other partners in the business.
A limited liability partnership is typically found in business where the partners work in the business, but they work independently from the other partners. Businesses such as law firms or medical practices are many times established as limited liability partnerships.
Is a limited partnership right for you and your business? That all depends on what you are doing with your business, and how you have it established. Limited partnerships are typically set up for short term projects, and are relatively common in the film industry and in real estate investment projects.
Different states have regulations regarding what qualifies your business as a limited partnership. Check with your states Secretary of State office for the regulations that are in place in your state.
For more information about limited partnerships, check out http://en.wikipedia.org/wiki/Limited_partnership
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