A limited partnership (“LP”) is one or more general partners and one or more limited partners. The general partners manage the business and share in profits and losses. The limited partners share in the profits, but losses are limited to their investment in the partnership. Limited partners are usually not involved in the day to day operations of the business.
How it’s Formed: The partners form the partnership by filing a certificate with the state’s corporate filing office, usually the Secretary of State.
How it’s Taxed: Each partner reports their share of the business’s income or losses on their personal tax return. This is called “pass-through” taxation because the profits and losses of the business pass through to the partners’ personal tax return. The partnership must also file an annual information return to report the income, deductions, gains, losses, etc., from its operations, but it does not pay taxes. All general partners are required to pay self-employment taxes (Social Security and Medicare). Limited partners are not required to file self-employment taxes because they are not involved in the day-to-day operations of the business.
- Limited liability for the limited partners.
- General partners can retain control of the day-to-day operations and management of the company while securing investment capital from limited partners.
- Good for short-term ventures like investment funds.
- General partners don’t have limited liability and can be held personally liable for the actions of the company.
- Limited partners can lose liability protection if too involved in the management of the company.