Limited Partnership Lecture Notes

Overview of Limited Partnership

• A distinct form of partnership from general partnerships.
• Involves two separate ownership and control classes.
• Similar to a general partnership or sole proprietorship with a limited partner.

Role of the Limited Partner

• Invests assets into the business, obtaining ownership interest.
• Cannot exercise control over daily business operations.
• Can provide guidance and resources to the general partner.
• May act as agents for the partnership but cannot make daily operational decisions.

Key Elements of Limited Partnership

Creation

• Must be filed with the state, unlike general partnerships that arise by default.
• Requires filing necessary documents with the Secretary of State's office.

Continuity

• Same as general partnerships; no automatic transfer of interest.
• Transfer requires a partnership agreement permitting sale or transfer of ownership.

Ownership and Control

• Control: General partner has complete control over business operations.
  • Limited partner may have voting rights on specific decisions as outlined in the partnership agreement.
• Ownership: Shared between general and limited partners based on ownership percentages.
  • Can have special allocations for profit distribution.

Personal Liability

• General partners face personal liability for debts and liabilities.
• Limited partners' liability is limited to their investment extent.
  • Limited partner risks only losing their invested amount.
  • General partner could be liable for any remaining debt not covered by business assets.

Compensation

• No salaries; compensation is through a pass-through system.
  • Profits or revenue at year-end are passed to partners for tax purposes.
  • Both partners taxed on profits based on ownership percentages or special allocations.
  • Complex tax rules surrounding self-employment tax, passive and active losses.

Taxation

• Pass-through structure: Profits taxed to partners according to ownership or special allocations.
• Limited partners may have different tax obligations, potentially exempt from self-employment taxes.
  • Complex rules relating to passive vs. active losses.

Conclusion

Understanding of limited partnerships involves grasping the roles, liability, profit distribution, and tax implications within the business entity structure.