McMillan Metro, P.C. Helps You Learn About Limited Partnerships And Determine If It’s Right For You
There are a wide range of options that entrepreneurs can choose from when it comes to the formal structure of their business. The Limited Partnership—or LP—as its commonly called—might be confusing on the surface. Is it like a General Partnership? Or more like a Limited Liability Corporation? What is a Limited Partnership anyway? And will it benefit you?
The core distinction the Limited Partnership has from any other business structure is the Silent Partner. That’s the one who invests their money but is legally bound to stay out of managing the business. Maybe you’ve got a business idea and there’s a handful of people—maybe a financially comfortable grandparent, maybe a retired friend—who like your idea and believe in you, but don’t want the stress or risk that comes from a full-blown partnership. This is the kind of circumstance where an LP could be ideal.
The LP’s key benefits are similar to that of an LLC or General Partnership. Foremost among them is pass-through income, wherein profits pass directly through the business and to your personal tax return. This avoids the corporate tax and the problem of double taxation. Reporting profits as personal income also means that expenses and losses—likely to be high in the early years—can be used as deductions to reduce your personal tax burden.
The silent partner benefits from not having to pay self-employment taxes, because they are not considered active in the business. And their death does not automatically dissolve the partnership. But the biggest advantage to being a silent partner is this: No liability beyond their original investment. While the principal partner can face liability and exposure of personal assets, the silent partner gains legal protection.
From the standpoint of the principal partners, the core advantage of an LP is that they gain needed capital without losing management control of the company. This not only benefits them personally, but can work well for the business, ensuring that a single cohesive voice is making all important decisions.
Everything has a downside though, and a Limited Partnership is no different. From the standpoint of the silent partner, the fact that they avoid the self-employment tax on profits turns into the reverse effect if there are losses. While the main partners can write off the losses on their personal return, the silent partner cannot—unless their offsetting income meets very specific conditions.
From the standpoint of the general partner, the cohesiveness and control gained from the LP means the loss of a voice that could be valuable in making business decisions—and increased government oversight to ensure that the silent partner isn’t speaking out of turn. LP’s are also subject to more disclosures and public filings than is the case for a general partnership.
These decisions have to be made at the beginning of the entrepreneurial journey, at a time when the role a partner may or may not play might not be completely clear. That’s where a McMillan Metro business attorney can provide valuable counsel. Our experienced lawyers have been through the process enough times to know what questions to ask and what issues are likely to arise. We’re also intimately familiar with the administrative requirements of an LP or any other business structure you choose.
It’s an exciting time to be starting a business and the very beginning of a business startup is the best time to ensure you’re making the right decisions. Let McMillan Metro help you. Contact us today for a consultation.