Partnerships are cooperative business arrangements that pool the resources and talents of one or more entrepreneurs for a common business purpose.
But not all partnerships are the same; there are several different types of partnerships, each with its own unique benefits and drawbacks.
Limited partnerships are business structures that include a combination of general and limited partners. Although there may be multiple reasons for forming a limited partnership, they are commonly used to protect the interests of individuals who are participating in the partnership exclusively for investment-related reasons.
The key to forming and operating a limited partnership is to carefully define the shape and scope of the partnership in a limited partnership agreement. A limited partnership agreement is both a legal and functional resource you'll need to improve the odds of your partnership's long-term viability.
Limited Partnership Definition
So what is a limited partnership? For starters, it isn't the same thing as a limited liability partnership. The main difference is that a limited partnership includes a general partner and one (or more) limited partners, while all partners have limited liability in a limited liability partnership. That means general partners have more liability exposure compared to a limited partner who is only liable to the extent of his initial investment.
In exchange for greater liability, the general partner has management control over the business as well as profit sharing and ownership rights. Limited partnerships are an ideal arrangement for investors to assume partial ownership of a business and limit their exposure at the same time.
Limited Partnership Agreement Tips
- The most fatal mistake a limited partnership can make is to not have a signed partnership agreement. This document could prove vital should the business experience losses or incur legal liabilities. Always create a partnership agreement – even if the partnership is comprised solely of friends and family members.
- A limited partnership agreement must clearly define each partner's role in the business, differentiating general partners from limited partners. It's also essential for the agreement to identify each partner's ownership interest for the purposes of equity, profit sharing and risk exposure. Don't forget to include provisions that address the protocols for partner exits.
- Your limited partnership agreement may be subject to state laws and regulations. Consider hiring an attorney to draft the agreement as a way to ensure you have all your bases covered.