Limited Partnerships (LP) have taken a back seat over the past ten years to the more popular Limited Liability Company (LLC). That being said, LPs are still often used to hold assets, raise funds, or to achieve achieve specific tax benefits. Here are 5 things you should know about Limited Partnerships.
- General Partners and Limited Partners. Every Limited Partnership consists of at least one general partner and one limited partner. The general partner has decision-making authority and is also responsible for the liabilities of the limited partnership. The limited partners participate in the sharing of profits and losses but do not have a voting interest. Because the general partner is subject to liability of the LP, the general partner is usually a company that does not hold significant assets. The limited partner on the hand is not responsible for the liabilities of the LP. For example, the general partner may be an operating s-corp or a shell company LLC while the limited partner may be an individual or a trust.
- Limited Partnerships and Asset Protection. Limited partnerships provide asset protection for the limited partners of the LP against the activities of the LP. For example, if there is a judgment against the LP, that creditor cannot go after the limited partners. In addition, if an owner of an LP has a judgment against themselves personally, that creditor cannot go after the assets in the limited partnership. Instead, the creditor is given a charging order that only entitles them to the assets or income that the LP decides to distribute to the owner of the limited partnership. As a result, the assets of the limited partnership are protected from the personal activities/liabilities of the owner. Because of this, many individuals will use limited partnerships to hold their valuable assets. While some states offer this same liability protection to LLCs (protect the entity from the owners actions), most states do not.
- Hold Rentals in an LLC. Because LP’s are a great place to hold assets, it is important to know what assets should be held in an LP. The following assets are commonly held by LPs: brokerage/investment accounts; second homes; valuable personal property, and raw land. An LP, however, generally should not hold rental real estate, because the tax rules applicable to LP’s limit an owner’s ability to fully take advantage of certain tax losses. As a result, please consult with your CPA prior to placing rental real estate into an LP.
- Canadians Love LPs for Real Estate. While LLCs are great for U.S. Citizens, they cause corporate taxes in Canada for Canadian residents. As a result, Canadians who own rental real estate in the U.S. should use an LP to hold their properties as opposed to an LLC. The LP profits flow through to Canada and are only subject to personal level taxes and are not subject to Canadian corporate taxes. LLC income, on the other hand, flows to Canada and is subject to both corporate and personal taxes.
- Limited Partnerships Are Great Entities for Raising Money. Limited partnerships are often used to raise funds because under the LP structure, the general partner (the one usually raising the funds) has authority to run the LP while the investors or limited partners do not have a voting right or interest. Because the LP structure places the control in the hands of the person raising the funds, the LP is presumed to be a security for securities law purposes and as a result a securities law attorney should be consulted as to the proper filings and disclosures necessary to raise funds and sell limited partnership interests to investors.
While an LLC is the most common default entity amongst business owners and investors, the LP can be a more beneficial entity or choice in certain situations and circumstances. In a brief consult with you attorney, you will be able to determine what entity is right for you while taking into account the tax and asset protection issues that will apply to your specific situation.