Business Planning - Limited Partnerships (LP)

A partnership is a voluntary association of two or more people, for the purposes of carrying on a business as co-owners for profit. The relationship between the partners is governed by state law and the partnership agreement. The partnership agreement serves as a contract between the partners, setting forth the rights and duties of the partners, and specifying the basis and proportions for sharing profits and losses. A Limited Partnership (LP) is a special type of partnership created by statute, consisting of two classes of partners: one or more limited partners and one or more general partners. It is a partnership in which only one partner is required to be a general partner.

A general partner in a limited partnership is similar to a partner in a general partnership, including individual liability for the acts of the partnership or of any member of the partnership engaged in carrying out partnership business. Generally speaking, the general partners have management control, share the right to use partnership property, share the profits of the firm in predefined proportions, and have joint and several liability for the debts of the partnership. Thus, the general partners have actual authority as agents of the partnership to bind all the other partners in contracts with third parties in the ordinary course and scope of the partnership’s business.

A limited partner is similar to a shareholder in a corporation, except that the limited partners have no inherent right to elect a board of directors. Limited partners are to have no day-to-day involvement in the management or operation of the business and are not generally liable for either the acts of the partnership or of the general partner. A limited partner does have certain rights to participate in certain limited decisions, such as the decision to liquidate and dissolve the partnership. The general partners pay the limited partners a return on their investment or a distribution as set forth in the partnership agreement itself. While the partnership agreement is not filed for public record, the limited partnership must file a certificate of formation with the Texas Secretary of State. The Secretary of State provides a form that meets minimum state law requirements.

In order to limit the liability of its general partners, a general or limited partnership may also opt to register as a limited liability partnership. Limited Partnerships are versatile types of associations that are used commonly for joint ventures, specific business purposes, to insulate venture capitalists or for asset protection purposes. Our firm can discuss your particular needs and advise whether an LP would be beneficial or cost effective for your situation.