Es­tab­lish­ing a limited part­ner­ship: liability, costs, and more

Par­tic­u­lar­ly when it comes to operating a trading company, there are many benefits to forming a limited part­ner­ship. With this legal form, capital providers can be in­te­grat­ed into a project as limited partners without par­tic­i­pat­ing directly in the business. They normally do not have a voice (unless there are cor­re­spond­ing reg­u­la­tions in the articles of as­so­ci­a­tion), so that general partners can focus on running the business undis­turbed. So, how do you set up a limited part­ner­ship? What should share­hold­ers bear in mind in terms of tasks, costs, and liability?

The legal structure of a limited part­ner­ship is outlined in the Uniform Limited Part­ner­ship Act 2001. Limited part­ner­ships are comprised of limited (silent) partners and general partners. Limited partners are only re­spon­si­ble for con­tribut­ing capital towards the en­ter­prise and are only liable for debts up to that amount. On the other hand, general partners are liable with their entire assets, but are fully re­spon­si­ble for running the company. In this regard, a limited part­ner­ship can be seen as a hybrid between a part­ner­ship and cor­po­ra­tion.

This means that the formation of a limited part­ner­ship requires at least two partners – one limited partner and one general partner. These can be natural or legal persons, as well as other part­ner­ships. There is no upper limit to the number of share­hold­ers.

One of the ad­van­tages of a limited part­ner­ship is that there are only a few re­quire­ments for its formation. For example, there is no minimum capital re­quire­ment – neither for the formation itself, nor for the in­di­vid­ual share­hold­ers. In principle, there is also freedom to choose the company name. Personal names can be used, as well as factual or fantasy names. A com­bi­na­tion of these com­po­nents is permitted. Make sure, however, that your company also appears in business op­er­a­tions under the name reg­is­tered when the limited part­ner­ship was founded.

Once you have found a suitable name for your limited part­ner­ship, and the roles of limited partners and general partners have been dis­trib­uted, you are ready to start setting it up. The first step is to draw up a part­ner­ship agreement, which describes in detail the struc­tures and powers, rights and oblig­a­tions of the share­hold­ers involved. Once the contract has been finalized, you can then go register your business with your Secretary of State. Once you have received your founding documents from the Secretary of State, you can register with the Internal Revenue Service (IRS) and receive a Tax Iden­ti­fi­ca­tion Number (TIN) or an Employer Iden­ti­fi­ca­tion Number (EIN). This will allow you to begin financial op­er­a­tions.

The basic com­po­nents of rights, oblig­a­tions, and areas of re­spon­si­bil­i­ty in a limited part­ner­ship are regulated in your local states part­ner­ship leg­is­la­tion. The part­ner­ship agreement is the decisive means for de­ter­min­ing all areas in which your limited part­ner­ship may choose to deviate from the legal basis. Before drawing up the contract, you and your partners should first ask yourself the following questions:

• Is a limited part­ner­ship the right legal form for your planned business?
• What exactly is the purpose of the company?
• Which business goals do you want to pursue?
• Where should the company’s reg­is­tered office be?
• How much start-up capital do you need?

Once these basic re­quire­ments have been clarified, you can draw up a mem­o­ran­dum and articles of as­so­ci­a­tion, which are not bound by any formal re­quire­ments. However, it is always advisable to include a written contract. The contract should at least define the common business purpose, the company name and reg­is­tered office, the names of general and limited partners, as well as the amount of their re­spec­tive capital con­tri­bu­tions. Further points you should include are:

• Reg­u­la­tions on man­age­ment and voting rights
• Powers of rep­re­sen­ta­tion
• Reg­u­la­tions in the event of with­draw­al and ter­mi­na­tion of share­hold­ers
• De­ter­mi­na­tion of with­draw­al rights
• Profit and loss par­tic­i­pa­tion
• Con­cil­i­a­tion clause (mediation in case of dis­agree­ment)

The articles of as­so­ci­a­tion must be signed by all share­hold­ers.

Those who wish to form a limited part­ner­ship are obliged to register their business with their local Secretary of State. Forms and re­quire­ments for the reg­is­tra­tion process vary from state to state. In the state of Cal­i­for­nia, for example, you are required to fill out Form LP-1 Cer­tifi­cate of Limited Part­ner­ship for domestic limited part­ner­ships, or Form LP-5 Ap­pli­ca­tion for Reg­is­tra­tion of Foreign Limited Part­ner­ship. The Cal­i­for­nia Secretary of State office also charges a $70 filing fee for any ap­plic­a­ble general documents, and ad­di­tion­al charges for copies. 

The reg­is­tra­tion form must include the limited part­ner­ship’s name (which must end in “Limited Part­ner­ship” or “LP”), an address for the company’s office, their legal agent, the name and address of each general partner, and the sig­na­tures of all partners. However, Secretary of State reg­u­la­tions vary from state to state, so it is important to check with your local office as their filing re­quire­ments may be different.

If you set up a limited part­ner­ship, you need to register with the IRS to receive your Tax Iden­ti­fi­ca­tion Number (TIN) or an Employer Iden­ti­fi­ca­tion Number (EIN). You will also be liable for taxes to the IRS. Limited part­ner­ships are required to file for annual income returns, em­ploy­ment taxes, and excise taxes. More in­for­ma­tion on the relevant taxes and the relevant forms are available on the IRS website.

After you have suc­cess­ful­ly formed your limited part­ner­ship and reg­is­tered it with all the relevant au­thor­i­ties, you can now of­fi­cial­ly begin business op­er­a­tions! Limited partners are excluded from this by default. They only have a say in trans­ac­tions and decisions that go beyond the actual purpose of the company. Their par­tic­i­pa­tion in the limited part­ner­ship only goes as far as what is con­trac­tu­al­ly agreed upon – usually as financial investors. Limited partners are liable for debts incurred to the value of their capital con­tri­bu­tions. General partners are liable with the full extent of their assets.

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