A Limited Partnership (LP), as compared to a general partnership, is formed by two or more people doing business. At least a person must act as the general partner. That person must have actual management authority for the day-day- activities of the company. This is in direct comparison to the other person(s) within the business in the role of a limited partner.
This person serves more of a silent / passive partner who invests in the company.
Limited partners cannot act in a management capacity. Both a limited partner and the general partner must enter into a company limited partnership agreement – this can be oral or written.
Avoid common mistakes made in company limited partnerships: a considering a limited vs general partner, a LP is managed and controlled by general partners; general partners have the authority to bind the company. Limited partners typically do not participate in managing the business. Any litigation that shows evidence of the limited partner participating in decision-making or management will result in costly consequences that include:
- Personal liability
- Piercing the corporate veil
- More business liability
- Expensive attorney fees in litigation
Difference between General and Limited Partnership
These types of business entities are similar except for the fact that a LP provides for at least one general partner and one or more limited. The following are but a few points regarding the difference between general and limited partnership.
What is the role of a general partner in an LP? When comparing a limited vs general partnership, Colorado business law shows that in a general partnership, partners have management control, share business property and profits based on the contents of a partnership agreement. They also share (joint and severally) in the corporate liability and debts.
Advantages of partnership relationships if legally complied with: Limited partners, on the other hand, are not liable for the company partnership obligations. The only risk is typically their capital contribution as stated in the partnership agreement. However, if limited partners participate in the management of the partnership business, they may lose their protected limited partner status and become liable for all risk. See information about your Colorado LLC Operating Agreement.
Limited Partnership Requirements
- A limited business partnership, including those in Colorado, must be filed with the Secretary of State.
- A foreign company limited partnership is a business partnership formed under the laws of any state other than this state or the laws of a foreign country and having one or more general partners and one or more limited partners.
General Partnership vs Company Limited Partnership – Role of Limited Partners
What is the difference between a General Partnership vs Limited Partnership? When considering a Limited vs General Partners, the role of limited partners, however, differs in a few ways:
- Limited partners do not play an active part in the business. The limited partners contribute financially to the business but have minimal control over business decisions or operations. They cannot bind the business.
- Limited partners are not personally liable. As a limited partner, when you give up management power, you get protection from personal liability. Instead, you run the risk of losing your investment.
- Tax implications for limited partners. As a limited partner, you are typically treated like general partners in that you report income tax based upon your share of annual profits. You generally do not have to pay self-employment taxes; because you are not active in the day-to-day business operations and management. You should consult with an accountant for more details.
Avoid Costly Mistakes: As you can see, when you seek to capitalize on the advantages of partnership relationships, you want to stay away from management of the limited partnership. This does not mean that you cannot request a review of the business books or meeting minutes.
However, you cannot place yourself in a position where it looks like you are using your investment leverage to weigh in on management decisions. A common mistake occurs when you are voting on a critical business decision. Stay away from it at all cost.
Another common mistake made when forming a limited partnership is that the business owners postpone having a lawyer to draft the requisite partnership agreements at the beginning. This is one of the most important legal aspects of considering a limited vs general partner – limiting your liability.
Limited Partnership Business Agreements
A Limited Partnership Agreement should include the terms of your limited business partnership. Contents should start from ownership interest and, at least, have buy-out provisions. You think about the various situations that can arise and include them in the agreement.
Remember that business liability is not the same as personal responsibility. You should most focus on the individual rights and what happens in certain events. Voting rights should be addressed in a partnership agreement.
Your partnership agreement should articulate the roles, obligations, and responsibilities. Remember that many contracts are formed at the early stages of the partnership formation.
Therefore, personal liability can attach quickly. Having a Colorado limited partnership lawyer to negotiate the terms and conditions in the early stages saves a headache and costly litigation in the long run.
For help with starting and LP and meeting the legal limited partnership requirements vs General Partnership, Call a Colorado business partnership law lawyer at 1-866-601-5518 for a FREE initial consultation.