A limited partnership is another type of organization permitted by state law. The limited partnership has some attributes of a regular partnership, and some attributes of a corporation. Nearly every state has adopted the Uniform Limited Partnership Act (ULPA) governing the formation and operation of limited partnerships.
Like a corporation, it is necessary that there be a written document (the limited partnership agreement), which is filed in an abbreviated form with the state. The public certificate of limited partnership includes things like the name of the general partner or partners, the registered office of the limited partnership, and the business of the limited partnership.
Like a regular (or “general”) partnership, the limited partnership is composed of two or more partners. The partners, however, are divided into two classes: general partners and limited partners. The limited partnership must have at least one of each. General partners are very much like the partners in a regular partnership in terms of their personal liability. In particular, they are personally liable if the limited partnership cannot pay its debts. On the other hand, limited partners are more like corporate shareholders. The liability of limited partners is limited to the amount of their investment in the limited partnership. The ULPA requires that limited partners not be involved in the management of the partnership’s day-to-day business. If they are, they run the risk of losing their limited liability protection and being treated as general partners.
Important Tip: If you are acting as a general partner in a limited partnership, you should be concerned about personal liability. Consider setting up a corporation to be the general partner and limit your liability.
A limited partnership is taxed like a regular partnership: it pays no taxes, and all profits and losses flow out directly to the general partners and limited partners.
Limited partnerships are popular vehicles when it is anticipated that the partnership will have losses or other tax implications beneficial to the investor limited partners. A limited partnership allows these investor limited partners to personally use at least some of the tax benefits, a benefit that would be unavailable to the shareholders in a corporation.