Tax Help 1040

Considerations in Forming a Limited Partnership

A limited partnership is a specialized form of general partnership. While it is very similar to a general partnership in most aspects, the limited partnership is made up of at least one or more general partners and at least one or more limited partners. The general partners bear 100% of the risk of liability for the debts of the business, the limited partners risk only their capital contributions, and nothing more. Limited partners may not take a role in the management of the business. If they do, they could be found to be general partners and therefore assume unlimited liability for business debts as a general partner.

Limited partnerships are attractive organizations for purposes of raising capital. The Limited partners are usually investors who have no particular expertise in the business operations. They are usually investors seeking investment opportunities with the hope of earning a meaningful return on their investment in a successful venture.

The Principal Characteristics of Limited Partnerships

Many characteristics of a limited partnership are similar to those of a partnership, yet some of its features are similar to a corporation. Under Utah law and federal tax law, a limited partnership has the following characteristics:

1) A limited partnership may be created only in accordance with a statute. If the statute is not followed, unlimited liability may be imposed on all the partners.

2) A limited partnership has two types of partners: general partners and limited partners. It must have one or more of each type.

3) All partner, limited and general, share the profits of the business.

4) Each general partner has unlimited liability for the obligations of the business. Each limited partner has liability limited to his capitol contribution to the business.

5) Each general partner has a right to manage the business, and he is an agent of the limited partnership. A limited partner has no right to manage the business or to act as its agent, but he does have the right to vote on several important matters, such as admitting new partners. If a limited partner does manage the business, he may incur unlimited liability for partnership obligations.

6) General partners, as agents, are fiduciaries of the business. Limited partners are not fiduciaries.

7) A partner's interest in a limited partnership is not freely transferable. An assignee of a general or limited partnership interest is not necessarily a partner, but is entitled only to the assigning partner's share of capital and profits, absent a contrary agreement.

8) Withdrawal of a general partner may dissolve a limited partnership, absent a contrary agreement of the partners. The withdrawal of a limited partner does not automatically dissolve a limited partnership.

9) A limited partnership pays no federal income taxes. Its partners report their share of the profits and losses on their individual federal income tax returns. A limited partnership files an information return with the Internal Revenue Service, notifying the IRS of each partner's share of the year's profit or loss.

Creating a Limited Partnership

A limited partnership can be created through the New York State Department of State.