A limited partnership interest is a stake in a business entity owned by one or more general partners and one or more limited partners. Typically, both general and limited partners contribute financially to the partnership, but the general partners manage the business as well, while the limited partners almost always do not. The limited partners primarily contribute to the business financially, providing initial or operating capital.
Liabilities of Limited Partners
One important difference between general and limited partners is their liability for the business. Limited partners usually have only limited authority to make business decisions and control assets. Because their authority is limited, so is their responsibility. So long as a limited partner's engagement in the business is within the scope allowed by the partnership agreement, courts usually find that a limited partner has no responsibility for business outcomes. If the company fails to pay its creditors, for instance, the general partners are liable for those payments, but the limited partners are not.
Similarly, the general partners are responsible for filing any necessary legal documents, including IRS Form 1065, the annual "Return of Partnership Income." Limited partners are not responsible for filing Form 1065, nor are they criminally responsible for its accuracy. Their sole IRS reporting responsibility with respect to the limited partnership is to file their individual Form K-1. In practice, most general partners file a K-1 return on behalf of each limited partner, also providing each partner a copy.
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Benefits of Limited Partnership Interests
- A limited partnership allows the limited partner to benefit from an ownership interest in a business entity without becoming responsible for its liabilities. Protection of assets is an important advantage of a limited partnership
- Limited partners can use partnership losses to shelter other income.
- Limited partnerships have the same pass-through taxation advantage of other partnerships and are only taxed once. This distinguishes it from corporations, where profits are taxed both at the corporate and individual stockholder level.
- Limited partnerships provide a popular and comparatively low-cost and uncomplicated way of raising capital for smaller business enterprises. They have been especially popular in the hospitality industry.
Dangers of Limited Partnership Interests
- The same light regulation of limited partnerships that make them a popular way of raising money also make them relatively easy for unscrupulous general partners to abuse.
- General partners have no obligation to hold public meetings or to document meetings they do hold.
- In the absence of regulatory protocols, partnership documents may unfairly advantage general partners, so that even profitable partnerships may not provide a reasonable share of profits to the limited partners.
- If general partners prove to be incompetent or untrustworthy, removing them may be difficult and expensive.
- Limited partners who provide advice or assistance to the general partners may become responsible for partnership liabilities.