Operating a Business as a Limited Partnership
There are many reasons for using a limited partnership for operating a business as a limited partnership, including:
- Discounting values for gifting,
- Providing management control to the founding generation,
- Providing continuity of management,
- Providing the ability to consolidate family wealth and training partners in wealth management and investment,
- Providing limited liability for the limited partners, and
- Providing marital property protection.
Additionally, limited partnerships have the advantage of perpetual life for asset ownership independent of the life of the founders. Limited partnerships allow the owners to have separate profit centers, business lines based on geography, and segregation of product-business operations by category. Limited Partnerships, being pass through entities, allow the partners to avoid double taxes on the sale of assets (as compared to a Subchapter C corporation (c-corp)).
When you use a limited partnership, there are issues you should not overlook. Taking care of these issues will help show that the limited partnership is a valid business, separate from its partners. If these are not satisfied, creditors bringing claims can try to pierce the limited partnership to hold the limited partners liable for limited partnership debts. One of the easiest ways to show that the limited partnership is a separate entity is to keep records showing it acts only through its general partner and was duly and validly formed and organized. This is shown by having records showing formation documents were filed with the proper state agency and that, if applicable, the limited partnership has qualified in any other state where it does business.
The general partner is responsible for making sure the applicable limited partnership formalities are followed. One often overlooked formality is keeping the name and address of the limited partnership's registered agent and address up to date. If the registered agent's name or address changes, the filed documents must be amended to reflect the changes. If this isn't done, several things can happen, none of which are good. If a creditor sues and cannot find the registered agent to serve because the registered agent is no longer at the address on file, the creditor may obtain substitute service. The creditor can get a default judgment if the suit isn't answered. If the registered agent resigns and a new one is not appointed, then the limited partnership's charter or its ability to do business may be forfeited, resulting in possible personal liability for limited partnership obligations.
Limited partnerships must have at least one general partner who is personally liable for the limited partnership and its debts. The limited partnership's primary purpose must be a business function–holding, managing, and administering assets. It cannot be formed only to avoid taxes or creditors. Generally, limited partners are not responsible for limited partnership debts so long as the limited partner is not also a general partner and does not participate in the control of the business in a way that causes a creditor to reasonably believe the limited partner is a general partner.
Both the general partner and the limited partnership must apply to the Internal Revenue Service for an employer identification number. The limited partnership must collect FICA (social security) and withholding taxes if it has employees, then it must deposit these funds with the IRS. If this is not done, the people responsible for the withholding and deposits will have personal liability. This liability will be separate from the limited partnership's liabilities and will not be discharged by the liable party's bankruptcy. Check with your accountant or tax advisor for specific advice.
This informational article from the law offices of Thomas D. Solomon is provided as a courtesy to provide information. It is not intended to be an exhaustive treatment of its subject matter but a presentation of some elements of such transactions. It is not intended to be legal advice or a legal opinion and should not be relied on in making legal or business decisions. If you have questions, please call.