What are the circumstances appropriate for setting up a Limited Partnership?
In this episode of Coffee with Carl, attorney Carl Zoellner guides you through the process of setting up an LP.
What are they and when might you use this prehistoric business structure?
First, just a quick little review of some basics. In a limited partnership, there’s two types of partners– the limited partner and the general partner.
The general partner of a limited partnership is the potential “problem child” of the business in that if they cannot fulfill debts, the general partner can be wholly responsible for them.
Thus the reason they’ve gone near extinction.
That, and LLC’s structure is so that pretty much everyone is a limited partner.
There’s nothing wrong with having limited partnerships. But for the most part, when looking at if someone needs a partnership set up, I tend to choose an LLC taxed as a partnership.
Like I said, all the same benefits, except none of the, “you are on the hook for me if I bounce.”
The other thing to be careful of with a limited partnership is if the general partner and limited partner are the same person. You’ve got to be careful of that, because limited partners from both a tax and legal perspective can become general partners.
Limited partners are intended to be more of the silent-type partners or the money partners who put money in and then don’t really have any active management within the business. It’s pretty common for us to get clients that tried to do their own thing, used the limited partnership, and ended up doing much of the management activities.
So, instead of being a limited partner within their own business, they end up being a general partner. Which as I mentioned, can be a real bummer.
Quick recap, I would just use an LLC taxed as a partnership.
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