What You Should Know About a Limited Partnership

Limited partnerships (LPs) are the third major type of limited liability business entities, along with corporations and LLCs. They are similar to the other two in some respects and different in other respects.

LPs have two types of partners. There are one or more general partners (GPs), and there are one or more limited partners.

General partners in a LP are similar to general partners in a general partnership.

They have the power of management and control, share the profits of the firm according to their proportions, and have joint and several liability for the debts of the business. All of the assets of the General Partner are at risk for the liabilities of the business.

A General Partner has management powers similar to an LLC Manager.

Unlike the Manager, however, the GP has full liability for the debts of the business. For this reason the GP is often a corporation or an LLC rather than an individual.

Limited Partners are similar to Members of a Manager-managed LLC. They have the right to share the profits of the firm according to their proportions, but they have no liability for the debts of the business. By the same token, they have no right of management and control. They differ from the shareholders of a corporation because they usually do not have the right to select the general partners. They are often investors who have no expertise in the management of the business and who are sought just for their capital contributions. They are passive investors.

This type of business entity is also an effective tool for family asset protection and estate planning purposes. Under this scenario, the parents (or their corporation or LLC) are the general partners, and their children are limited partners. This is often referred to as a Family Limited Partnership. Incidentally, the same person or entity can be both a general partner and a limited partner.

Filing a Certificate with the Secretary of State is the First Step in Forming an LP

Forming an LP is a relatively simple process in Nevada. The first step is filing a Certificate with the Secretary of State.

It is necessary to supply the following information in the Certificate:

1. Name: This name must be different from the name of any other business entity filed in Nevada. It must include an indication that it is a limited partnership, such as "LP." There are some words that can't be used without prior approval by a governmental regulatory body, such as "accountant," "bank," "trust," or "engineer." To check on name availability for a new LP in Nevada click here.

2. The name and street address of the resident agent. Every business entity in Nevada which is registered with the Secretary of State must appoint a resident agent. The resident agent is the person or entity located in the State of Nevada which is appointed by the business entity to accept service of process if the company is sued. Also, the resident agent is the official liaison between the LP and the Secretary of State. The resident agent must sign the Certificate signifying that he accepts the responsibility to act as resident agent.

If you would like information about the resident agent or legal services provided by our law firm, please click here.

3. The name and business address of each organizer executing the certificate.

4. The name and business address of each initial general partner. Please note, it is not necessary to disclose the limited partners.

5. The latest date upon which the LP is to dissolve. It is, however, permissible for the LP to have perpetual existence.

6. Any other matters the organizers determine to include.

To see the form which is prescribed by the Nevada Secretary of State, click here.

As usual, there are filing fees.

There is a $75 filing fee which must be paid at the time of filing the Certificate.

For those who are in a hurry, the Secretary of State will give priority handling in consideration of an expedite fee. The expedite fee for processing within 24 hours is $125. For those who are in a BIG HURRY, there is a 2-hour expedite fee of $500 and a 1-hour expedite fee of $1,000.

Your LP will commence its legal existence on the date the Secretary of State files in the Certificate. You shouldn't sign any contracts on behalf of the company or attempt to open a bank account for the company until the Certificate is filed.

A Partnership Agreement should be prepared as a part of the Formation of the LP.

The Agreement should contain all of the important rules and guidelines for the operation of the partnership. It should contain such things as the name and identity of the General Partner, the GP's percentage of ownership, the GP's powers and the limitations on its powers, the name and identity of the Limited Partners, the LPs' percentage of ownership, the conditions for admission, if permissible, of new Partners, the term of the Agreement, the time and notice requirements for meetings, quorums, rules relating to the amendment of the Agreement, and just about anything else that the Partners feel is necessary or desirable for the operation of the company.

There is no standard printed form for the Agreement. The Agreement should be prepared and reviewed for the specific needs of the partnership by an attorney. A well drafted Agreement can be tremendously helpful for giving guidance about the operating procedure for the company or in the event of a future dispute between the partners.

If you would like information about the small business legal services provided by our law firm, including formation of Limited Partnerships, please click here.

Additional Requirements to Get Up and Running Legally

There are 3 more matters you have to handle within a short time after you file the Certificate.

1. You have to file an initial list of general partners within about 30 days. This information becomes a public record. Importantly, Nevada does not require LPs to disclose the identity of their Limited Partners. As you might expect, there's a filing fee of $125.

You'll have to file a similar list once a year before the anniversary date of the filing of your Certificate. You guessed it - there's a filing fee of $125.

If you don't file the initial list or the annual list before the due date, the Secretary of State will declare your LP in default. If the failure continues for a year, the LP forfeits its right to do business.

For some reason, many small business entities seem to have difficulty getting their lists filed on time. If we are the resident agent, my office monitors the filings and nags the company to get the list filed.

2. You have to get a Nevada state business license. Again, there's an annual fee of $100. Our office assists our clients in preparing and filing the application for the Nevada business license.

Warning! When you sign the List of General Partners, you should know there is a sentence which requires you to state under penalty of perjury that the company has complied with the business license law. This may be a trap for the unwary or the uninformed.

3. You must get a federal employer identification number (EIN). The company uses this number in connection with all tax filings.

Again, if you would like information about the small business legal services provided by our law firm, please click here.

A Brief Comment on Taxes . . .

Limited partnerships are taxed as a partnership. That is, the company files an informational return, and each of the partners (whether General or Limited) reports their share of the income and losses on their own return.

If you have any question about taxes, you should consult a tax professional.

Our firm is knowledgeable about all types of business entities, and we would be pleased to assist you in this area. For a no-charge 1/2 hour consultation with Dave Guinan, click here.