Continuing our exploration of business structures, we move from general partnerships to limited partnerships.
Partnerships are the base level business entity and can be formed in Georgia even without the intent of the parties. The difference between a general partnership and a limited partnership is that in a limited partnership, one or more of the partners are not involved in the business’s day-to-day operations.
There are two roles in a limited partnership: general partner and limited partner. The general partner acts as the CEO or Manager of the entity. Meanwhile, the limited partner serves as an investor – they can obtain the entity’s tax returns, get information about how the limited partnership is run, inspect the limited partnership’s books or records, and even bring a derivative action. However, a limited partner does not run the business.
How is a limited partnership established?
Each state has specific steps to form a limited partnership. Generally, a limited partnership is formed by executing a partnership agreement between all the partners and filing a Certificate of Limited Partnership with your state’s Secretary of State’s Corporate Division.
In Georgia, the information required on a Certificate of Limited Partnership includes the limited partnership’s name, the name and business address of each general partner, the address of the entity’s registered agent (for service of process if sued), and anything else the general partner wants to include.
The entity’s name must contain the words “limited partnership” or “LP” to signify its structure.
Advantages of forming a limited partnership
There are many advantages of forming a limited partnership. First, similar to an S corporation and general partnership, limited partnerships are treated as a pass-through entity for income tax purposes. This means that the partners pay for the entity’s income taxes and can deduct partnership losses on their personal tax returns.
Second, limited partners are insulated from personal liability for the entity’s actions, while the general partners have personal liability for the company’s actions.
While not a direct advantage of a limited partnership, a general partner can be a limited liability company (“LLC”). Why is this beneficial? The general partner has personal liability for the entities’ debts and obligations. The general partner can form an independent LLC and make that LLC the general partner. Doing so limits the general partner’s personal liability (by funneling it through another entity) while maintaining the limited partnership’s tax advantage.
This extra step creates an ideal corporate structure for many businesses, particularly those that involve real estate, including real estate investors and developers.
Disadvantages of forming a limited partnership
Limited partnerships have similar disadvantages to general partnerships. These include cash flow issues caused by the business’s pass-through structure, transferability of partnership status, and personal liability.
However, the limited partnership is also required to file annual reports with the Georgia Secretary of State.
Is a limited partnership right for your business?
The best entity for your business depends on your goals as well as your liability, taxation, and management preferences.
An experienced, knowledgeable Georgia business law attorney can help you figure out which entity is right for your business. Call our office to speak with one of our business attorneys. We are here to support you at every business stage.
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