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Limited partnerships are usually a type of business owned by two types of partners: general partners and limited partners. These are often used as investment vehicles for investing in such assets as real estate.
A limited partnership is a form of partnership similar to a general partnership except that while a general partnership must have at least two general partners, a limited partnership must have at least one general partner and at least one limited partner. The general partner oversees and runs the business while limited partners do not partake in managing the business. However, the general partner has unlimited liability for the debt, and any limited partners have limited liability up to the amount of their investment.
In this sense, we must highlight that limited partnerships are different from limited liability partnerships, in which all partners have limited liability. Therefore, you should not get confused with these terms.
Why should you create a Limited Partnership?
Limited Partnerships are typically created for two purposes. As we have mentioned before, one of the most common reasons to create an LP is to develop commercial real estate projects. In these cases, the General Partner(s) is usually the organizer and manager of the construction and maintenance of the project, and the Limited Partner(s) is the investor who puts up the money for the project and then gets a return from the completed project's income stream.
We could say that in this scenario, a Limited Partner is a passive investor. Shopping malls and apartment complexes are just a few of the typical projects that might be built and managed through a Limited Partnership.
Then, limited partnerships are also an estate planning vehicle where the General Partner(s) is the parent who holds real estate (usually commercial real estate), and the Limited Partners are the heirs of the General Partner. This type of Limited Partnership is sometimes referred to as a "Family Limited Partnership." Typically, this is used when the Limited Partnership asset has an income stream, and the parties do not want it to be sold upon the death of the General Partner.
Of course, these are not the only cases in which a limited partnership can be the most beneficial option but are the most common. Now, speaking in general, some advantages of a limited partnership include:
- Investment potential: Limited partnerships can generate capital investments by adding more limited partners.
- Personal asset protection: The limited partnership structure offers liability protection up to the company's limited partners' amount of investment.
- Full oversight: The general partner has complete management control of the limited partnership.
- Pass-through taxation. A limited partnership's income is not taxed at the business level; instead, business profit and loss are "passed through" to the partners for reporting on their personal tax returns.
The process to create a Limited Partnership
Like most businesses, you can form a limited partnership by registering with your jurisdiction and paying a filing fee. Registration also confirms each limited partner’s investment and liability.This application is complex, but we can offer you legal advice when establishing this partnership and completing the application form. Our wide team of experts has experience in a broad list of jurisdictions.
More specifically, this agreement has to establish how to make business decisions. These decisions include how to split profits or losses, resolve conflicts, ownership structure, and how to close the business if necessary. Besides this, you should discuss and include provisions for the limited partners' role and the effect of the death, bankruptcy, or insolvency of the General Partner or Limited Partner on the continued existence of the Limited Partnerships.
What can we do for you?
Here at Mundo, we can help you register limited partnerships (LP) in different jurisdictions worldwide. Tell us about your business goals, details, and questions. Our legal experts can help you complete your paperwork since we create solutions for you, depending on your specific business needs. Contact us right now!
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