Limited partnership (LP) is a business structure that features a hybrid nature.
It’s a type of partnership that comprises of a general partner and limited partner. To start with, the general partner forms business and performs all the management roles and responsibilities. On the other hand, limited partners invest money in that entity but don’t run the business.
It’s no doubt that LP lies among the best and popular business structures because of its many incredible benefits.
Let’s look at a few of them
1. Easy and Cheap to Start
Limited partnerships are easy and less costly to start, unlike corporations that require lots of legal formalities. In contrast, this kind of partnership doesn’t require the many formalities needed in corp.
2. Tax Benefit
Nobody enjoys paying taxes. Everyone wants to keep more money in his or her pocket.
If a business doesn’t involve paying tax, then that’s an excellent deal- and limited partnership qualifies.
This type of partnership itself doesn’t require paying income tax. All the profits and losses gained flow untouched by the IRS to the individual limited partners. In other words, it’s called a flow-through entity. You just enjoy the cash flows unless you make losses.
Limited partners obtain their income inform of distributions. A portion of the distributions is taxed as income tax, some not taxed if it’s proven to be returned of invested capital, and the other portion treated as capital gains.
Limited partnership shares its profits to the limited partners untaxed. However, they must pay for income tax. Interestingly, their income is only taxed once.
Compare this business structure with a corporation where they have to cough a high tax percentage of the profits. In fact, they face double taxation- state and federal taxes. Even worse, some of the profits are retained for retire debt, expansion, and many more.
3. Easy to Raise Capital
This partnership comprises of more than one individual. That means you can raise large amounts of capital within no time.
You can be sure that if a business with enough capital ventures into an opportunity, its scope increases magically. What do you expect when the business scope increases? Obviously, the profits will start flowing like a spring.
Another essential thing to note, when a business starts with large amounts, the foundation is strong. This foundation is what is considered critical in terms of business development.
Another amazing thing about this partnership is that limited partners can never lose more money than they invested. Therefore, potential investors won’t be scared to chip in their dollars.
Some limited partnership agreements require the general partner to issue an assessment. If a limited partner finds it viable, he/she can pump in even more income for the firm to start operating.
4. Allows Friends and Family to Pool Money
This form of business creates an easy way for friends and families to pool their resources to make a major investment, such as running a restaurant, investing in real estate, or even acquiring an existing company.
Guess what? With enough resources, you enjoy economies of scale. Yes, you can access the best lawyers, bank services, auditors, accountants, and more.
If managed well, the business can lead to higher returns on investment and promote wealth maximization. Isn’t that amazing?
The best example is Warren Buffet. They started a family limited partnership in his early years. Eventually, they formed Buffet Partners ltd, which become the springboard of what he is today.
5. Peace of Mind
Limited partners enjoy peace of mind since they know if the partnership is sued, their assets are safe. This principle is referred to as limited liability.
Additionally, they are not liable for business’ debts- they can’t be liable to a higher amount than they have contributed. With this principle, many people opt for LP rather than other business structures.
Limited partners receive their share of profit or losses without even participating in running the business. Some of the partners who don’t wish to participate in daily operation activities only sit back and leave the general partner run the day-to-day business activities.
Also, if they don’t want to involve themselves in decision making, they can choose to remain silent. That explains why some states refer to limited partners as silent partners.
If the limited partners decide to quit the business, that’s not a death sentence to that business. Again, if new partners are introduced, the business will remain undissolved. That means that the company won’t suffer turnover problems from the silent partners.
The limited partnership calls for less paperwork as compared to corporations. The only paperwork required is when drafting the partnership agreement, which should be filed in the jurisdiction where the business is carried on.
9. General Partners Dominate
If you are a general partner, you enjoy all the powers in the partnership. This means that you’re the one to decide what should be done or which direction to take. And if the business is run by two general partners, they share the powers equally.
Bottom line Limited partnerships can best suit businesses that want to attract investors. Assuredly, this is an excellent way of allowing them to benefit from venturing into your business without involving them in running the business.
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