While similar to General Partnerships (GPs), Limited Partnerships (LPs) have some distinct advantages. A General Partnership is a for-profit venture of at least two partners who share management duties. General Partners share profits and bear the responsibility to pay any and all judgments, including both intentional and negligent acts.
On the other hand, a Limited Partnership contains at least one General Partner and one Limited Partner. Sometimes called “silent partners,” Limited Partners lack the management control and right to property afforded to the General Partners. As such, their liability is limited to the extent of their registered investment.
Limited Partners avoid “double taxation.” LPs are not taxed at the business/corporate level and instead are “passed through” to only be reported on their personal tax returns. The tax benefits and liability protection of LPs make them an enticing option for potential investors.
Although Limited Partnerships are regulated at the state level, the bureaucratic process of forming an LP is fairly standardized. Follow along as we guide you through the steps to LP formation.
1. Picking a Name
If you choose to name your business anything other than your personal name, most states require you to register a “Doing Business as” (DBA) name. This may also be required by your county or city.
Be sure to search for your business name’s availability before filing. Search your local Secretary of State Office’s database to make sure your name is not the same or too similar to another business; some states also prohibit certain words in your entity name. Also be sure to check with the U.S. Patent and Trademark Office to make sure your name doesn’t violate any registered trademarks.
Some states allow you to reserve a business name before adopting a proposed name. The lengths of reservations vary from state to state; your Secretary of State Office should be able to clarify the reservation terms.
Some states may require you to include “Limited Partnership” or a related abbreviation in your fictitious business name.
2. Draft a Limited Partnership Agreement
A Limited Partnership Agreement is not mandatory in most states, but it is highly recommended. Since partnership legislation varies from state to state, the partnership agreement allows for standardized terms of a Limited Partnership. In some cases, it may allow you to bypass certain provisions of state partnership law.
A Limited Partnership Agreement should address profit sharing, loss distribution, asset distribution, participation rights, distribution prevention, buyout agreement, asset appraisal and expulsion or addition of partners.
3. Designate a Registered Agent
Some states require every business entity to have and maintain a registered agent in their state. The registered agent must be an individual resident or a business entity that is authorized to conduct business in the state. The agent must have a physical street address in the state.
If the business is physically located in the state, it may act as its own agent.
4. File a Certificate of Limited Partnership
Completing and filing a Certificate of Limited Partnership is mandatory.
The certificate is a more generalized form compared to a partnership agreement. Depending on the state in which you choose to file, the certificate requires basic information of your business. This includes entity address, agent name and address, names and addresses of partners, etc.
This certificate is filed with the state, and forms can be found online at your local Secretary of State website.
5. Register for an Employer Identification Number
Sometimes known as a “Federal Tax Identification Number,” an Employer Identification Number (EIN) is a nine-digit number used by the IRS to identify a business for tax purposes.
An EIN is required to open business banking accounts, to hire employees or to make business transactions.
6. Obtain a State ID Number
Some states also require a state ID number.
Like the EIN, these help classify a business for tax purposes. If required, they are available via your state’s Department of Revenue.
7. Obtain Required Licenses and Permits
Federal, state and local authorities require permits and/or licenses for specific companies to operate. These include occupational and trade licenses, zoning and health permits, as well as other requirements.
A useful database of federal and state business licenses and permits can be found at the U.S. Small Business Administration website. Information on required county and town permits can be found at your local County Business License Office or City Hall. Sites like License123® can also help determine what is required for your business.
8. Filing for Foreign Limited Partnership
Formed under the laws of another state or country, a Foreign Limited Partnership is an LP that seeks to apply for limited partnership in another state. Most states require foreign LPs to file a separate Foreign Application for Registration in addition to the Certificate of Limited Partnership.
These applications require identification of principal executive officers and registered agents in addition to the information in the Certificate of Limited Partnership.
Many states also require a Certificate of Good Standing for businesses applying for a Foreign Limited Partnership. The Certificate of Good Standing verifies that the business actually exists and that it is in good standing in regards to dues, taxes and filings. It verifies that the company is authorized to conduct business in its respective state.
9. Workers’ Compensation Insurance
Some states require Limited Partnerships to provide workers’ compensation insurance for their employees. Your state’s Department of Industrial Relations will let you know if insurance is required. The department can also help you locate insurance providers in your state.
Limited Partnerships are a great way for a business to generate capital through partners without relinquishing management and property control. While the process may be complicated, due diligence is necessary to expedite and ease the process.
Since legislation varies according to state, a local business-formation attorney can be an invaluable resource when forming a Limited Partnership. The IRS also has a useful database for links and information on doing business in each of the 50 states and the District of Columbia.