Forming a LP or LLP

Forming a limited partnership. Art by: Aidan Jones

Limited means that most of the partners have limited liability (to the extent of their investment) as well as limited input regarding management decisions, which generally encourages investors for short-term projects or for investing in capital assets. This form of ownership is not often used for operating retail or service businesses. (SBA)

Limited Partnership is exactly how it sounds. In a limited partnership (LP), instead of full equal responsibilities and profits the partnership is instead limited. Your partner would only be liable up to the percentage they have financially invested into the business. Before you can decide which partner entity is best for you, you must have a clear understanding what each entity means.

Example: Marjorie invested 40% into Kelly's Daycare Center so she is liable for 40% of the business debt and other reverse action against the business. Marjorie has no management control and instead receives a return on her investment from her partner.

One of the partners act as the general partner (GP) who is in charge of the day to day activities while the other partner involvement is more limited and works more like a silent partner (LP). 

LPs have complex formation requirements, and require at least one general partner who is fully responsible for partnership obligations and normal business operations. The LP also requires at least one limited partner, often an investor, who is not involved in everyday operations and is shielded from liability for partnership obligations beyond the amount of their investment. LPs do not pay tax, but must file a return for informational purposes; partners report their share of profits and losses on their personal returns. (SBA)
 
Limited Liability Partnership (LLP)

Limited Liability Partnership (LLP) protects you from being legally responsible for your partner’s negligence.

Limited partnership (LP) allows your limited partner some of the corporation benefits and limits their liability to the extent of their investment into the business but limited liability partnership (LLP) gives protection to all partners. No longer is your partner liability limited to their business investment but you also are protected from being held personal liable for the debts and legal actions against your business. This also allows each partner an equal voice in the decision and creative decision making.  Since this is all being governed on the state level each state can have different standards and rules for limited liability partnership. Some states may require that only specific type of business can become a LLP and some states do allow the partners to be personal liable for certain type of judgments, so make sure to check with your state website for more information.

 LLPs are organized to protect individual partners from personal liability for the negligent acts of other partners or employees not under their direct control. LLPs are not recognized by every state and those that do sometimes limit LLPs to organizations that provide a professional service, such as medicine or law, for which each partner is licensed. Partners report their share of profits and losses on their personal tax returns. Check with your Secretary of State's office to see if your state recognizes LLPs and if so, which occupations qualify. (SBA)

When deciding which option is for you, keep your business goals in mind. If your business goal is to have management control that doesn't mean that having a partner is out of the question. The question instead becomes, which entity of partnership will allow you to keep management control but also allow you to receive the benefits of having a partner such as assistance in raising capital?

Deciding on a business entity
In making a choice, you will want to take into account the following:

•    Your Business goals
•     Business structure (How do you want your business structured?)
•     Business legal vulnerabilities(Are you entering a high-risk business that may make your business vulnerable to lawsuits?)
•     Tax effects (What are the tax implications and which entity offers the best tax benefits?)
•     Profit/Loss projection and investment
•     Start Up cost
•     Ease of ending business

 How to become a LP or LLP?

    Business Name Check
You have to make sure that the business name that you have isn't already being used by another LLC company operating in the same state as you.

    Paperwork
You will need to complete the necessary paperwork and pay the requested filing fee. To get the necessary paperwork go to your states website for the secretary of state.

www.sos.state.(enter your state abbr.).us

    Public Announcement
Some states actually require you to make a public notice about your intentions to become a LLC. Check with your state to see if they require a public notice.

Make sure to visit your secretary of state website for state specific requirements for starting a partnership, LP or LLP in your state.

www.sos.state.(enter your state abbr.).us

If you are contemplating getting a partner use today’s discussion to help you get closer to figuring out what partnership entity is best for you.


"Copyright © 2010, Dawn Austin, Recipe for Small Business, writer, SmallBiz Stew. All rights reserved. Permission granted to reprint this article on your website without alteration if you include this copyright statement and leave the hyperlinks live and in place."