Limited Partnership Agreement: A General Guide

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A limited partnership agreement is a document summarizing a business partnership's terms and conditions where one or more partners are "limited partners”. These limited partners contribute funds to the partnership but are not actively involved in the firm's everyday functions. Rather, they have restricted liability and are only accountable for the amount of their investment in the partnership. On the other hand, the "general partner" handles the firm and has unlimited accountability for the partnership's obligations and debts.

Key Provisions of a Limited Partnership Agreement

Below are the key provisions included in a limited partnership agreement.

• Introduction: A partnership agreement's introduction section typically includes all partners' names and addresses, the partnership's name, and the business's purpose. Additionally, this section may provide a brief overview of the partnership's structure and goals.
• Capital Contributions: The section regarding capital contributions outlines the specific amount and timing of contributions made by each partner. It may also include any provisions for changes in the partnership's capital structure or additional contributions.
• Sharing of Profits and Losses: This section details how the profits and losses of the partnership are shared among the partners, including any provisions for preferred returns for limited partners.
• Management and Control: The partnership agreement's management and control section outlines the general partner's responsibilities and authority in managing the partnership's operations. It may also address the appointment or removal of the limited partners and general partners' rights to participate in management decisions.
• Restrictions on Partners: This section may contain restrictions on partners' activities, such as confidentiality agreements, non-compete clauses, or prohibitions on borrowing or lending money without the partnership's approval.
• Termination and Dissolution: The termination and dissolution section outlines the circumstances under which the partnership may be dissolved, such as bankruptcy, a partner's death, or a partner's withdrawal. It may also address the distribution of assets upon dissolution.
• Dispute Resolution: This section provides procedures for resolving partner disputes, including arbitration or mediation.
• Other Provisions: The miscellaneous provisions section of the partnership agreement may contain any other relevant provisions, such as notices, governing law, and amendments.

Types of Limited Partnership Agreements

A limited partnership is a business entity that includes both general and limited partners. The general partner manages the business and is personally liable for the partnership's debts and obligations, while the limited partner is only responsible for their investment in the partnership. To establish a limited partnership, partners must agree to a limited partnership agreement, which outlines the rights and responsibilities of each partner. There are various limited partnership agreements, each with benefits and drawbacks. Some of them are as follows:

• Fixed-Term Limited Partnership Agreement This type of agreement has a specified end date and is ideal for partnerships formed for a specific purpose or project. It provides partners with certainty and prevents disputes over the partnership's duration. At the end of the fixed term, the partnership is dissolved, or the partners renew the agreement.
• Irrevocable Limited Partnership Agreement Partners cannot terminate this agreement without the consent of all partners, ensuring stability and commitment. Nevertheless, it limits flexibility and can make dissolving the partnership challenging.
• Revocable Limited Partnership Agreement Partners can terminate this agreement at any time, providing them with flexibility and allowing them to dissolve the partnership if they are not content with other partners' conduct or performance. However, it can lead to uncertainty and hinder future planning.
• General Partnership Agreement with Limited Liability This hybrid agreement provides all partners with limited liability for the partnership's debts and obligations while allowing them to manage the business. It is used when partners want to be involved in handling the business but restrict their liability.
• Silent Limited Partnership Agreement In this agreement, the limited partner does not manage the business and has no say in its run. It is useful when the limited partner only wants to invest in the business and not participate in daily operations. This arrangement eliminates the limited partner's liability for the partnership's debts and obligations, and they do not have to manage the business.

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Benefits and Drawbacks of a Limited Partnership

One of the primary benefits of an LP, particularly for limited partners, is that their personal liability is restricted. They are only accountable for the amount they have invested in the LP. These entities are utilized by general partners (GPs) to raise capital for investment. LPs are a common structure for hedge funds and real estate investment partnerships.

Another benefit is that limited partners are not subject to self-employment taxes since they are not active participants in the business. LPs are considered pass-through entities, where the entity files a Form 1065, and partners receive Schedule K-1s that they use to report their share of income or loss on their tax returns.

On the contrary, limited partnerships necessitate that the general partner bears unrestricted liability. They are responsible for all management control and are liable for any debts or mishandling of business transactions. In addition, limited partners are only allowed limited involvement in operations. They forfeit their personal liability protection if they are deemed to have a non-passive role.

Limited Partnership vs. LLC

When deciding on the legal structure of a business, two popular options are limited partnerships (LPs) and limited liability companies (LLCs). While both entities offer some similarities, some distinct differences exist.

• Corporate Structure One difference between LPs and LLCs is their corporate structure. LPs consist of general partners and limited partners, while LLCs can have an unlimited number of members. In general, all members of an LLC have the right to manage the business, while limited partners in an LP cannot take an active role in managing the business.
• Tax Treatment Both LPs and LLCs have pass-through tax treatment, which means investors are responsible for reporting their share of the entity's profits on their tax returns. Additionally, neither of these entities is subject to federal income tax.
• Liability Another primary difference between a limited partnership and an LLC is the issue of liability. General partners in an LP have unlimited personal liability, meaning they can be held personally responsible for any debts or obligations of the company. In contrast, LLCs often provide more protection for their members, as members are usually not held directly liable for the company's debts.
• Tax Flexibility Eventually, LLCs offer a bit more flexibility in terms of taxation. They can choose to be taxed as a C Corporation, an S Corporation, or a disregarded entity, while LPs default to being taxed as a partnership.

Key Terms for Limited Partnership Agreements

• Management Responsibilities: The responsibilities and powers of the general partner in managing the partnership.
• Profit and Loss Allocation: The method of dividing the partners' profits and losses.
• Dissolution and Termination: The procedure by which the partnership is dissolved and its affairs are wound up.
• Transfer of Ownership: The process by which a partner can sell or transfer their ownership interest in the partnership.

Final Thoughts on Limited Partnership Agreements

A limited partnership agreement is a crucial legal document that provides a framework for handling a business partnership between general and limited partners. It summarizes the responsibilities and rights of each partner and provides a clear structure for handling the partnership's operations, profits, and losses. A well-drafted limited partnership agreement can help prevent conflicts and safeguard the interests of all partners involved.

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