A partnership is the easiest and least expensive way to create a multi-owner business arrangement.
Like sole proprietorships, general partnerships are pass-through organizations – profits and liabilities pass through the business to the partners. Partners are personally liable for the company's obligations and report profits on their individual tax returns.
A limited partnership is similar to a general partnership except that only one partner is required to be a general partner. The other partner(s) can be a limited partner with limited liability exposure. Limited partnerships are common in situations where an investor assumes a limited partner role, reducing his exposure to the amount of his initial investment.
Limited partnerships typically file a Certificate of Limited Partnership with the state to formalize the nature of the partnership. Most states don't require the filing of this document, but they strongly encourage limited partnerships to complete and file the document for the sake of legal clarity.
What is a Certificate of Limited Partnership?
In theory, a Certificate of Limited Partnership is a simple document that is created at the start of a limited partnership. Its purpose is to describe the existence of a limited partnership arrangement, eliminating the possibility of a future claim that the limited partner is a general partner. Without this agreement, many investors would be reticent to invest in a non-incorporated business venture. Filing the document with the state gives the document an added level of legal enforceability and enters the nature of the partnership into the public record.
What information does it contain?
The information contained in a Certificate of Limited Partnership is restricted to the basics. In addition to the partnership's official name and contact information, the form may include information about the purpose of the partnership, contributed assets and the names of general and/or limited partners. Forms vary according to your state of residence, so you will need to do your homework to learn about your state's specific information requirements.
Why is it necessary?
A Certificate of Limited Partnership is a necessary document because it clearly articulates the legal nature of the partnership. However, it would be a mistake to view the Certificate of Limited Partnership as the only form that is required for the formation of a limited partnership. This document does not include details about ownership shares or exit strategies. You'll need to create a separate partnership agreement to hash out the details that aren't covered in the certificate.