A limited partnership (LP) is also known as a limited liability company (LLC). A limited partnership consists of two parties: a giver and a receiver. The giver is the person who has the benefit of the partnership. The receiver is generally, but not always, the person or entity that has the loss in the partnership. There are several characteristics associated with limited partnerships that can be used for the benefit of the giver.
Limited partnerships are created through a document called a “creative contract”. In these contracts the partners voluntarily agree to limit their share of the partnership and create a partnership. They can be established without having to go through any process at the court of law. Unlike a general partnership, there is no necessity for an election to choose a partner. A general partnership may come to an end through divorce, death or other unforeseen events. When creating a limited partnership, the partners must follow the guidelines laid down by the law, which generally requires the approval of the state government.
The limited partners are obliged to respect the profit levels set out in the partnership agreement. If the profit levels are too high, the partners will need to renegotiate the profit levels. Limited partnerships have advantages over general partnerships, which include limited partners’ protection from creditors, their right to dividends, their ability to shield themselves and their reputation from the public eye. There is also a tax advantage to the limited partners because they usually pay less corporate income tax than their General Partner. The limited partners are also protected from liability for debts and the like.
Like any partnership, the limited liability setup allows one general partner to control the business. The general partner (LP) can make important business decisions that have an effect on the limited partners and vice versa. This is referred to as liquidity. Unlike general partnerships, there is no need to provide financial support to the limited partners in the form of loans or dividends. They do not share in the company’s profits and they cannot bring themselves under the watchful eye of the corporation. It is up to the general partner to keep the business profitable and free of outside influence.
Like shares in any company, limited partners (LP), unlike the general partners (not), have a limited ability to manage the partnership. They cannot change the partnership’s ownership, they cannot add partners or they can only add partners by paying them a percentage of the partnership’s profits. In most cases, the general partner has the power to make the day to day decisions. The limited partners are usually paid a specific fee for the services they perform, which is 10% of the partnership’s annual revenue. The fees are determined by the law in terms of the services performed, the length of time they have been a member of the partnership and other factors.
There are different types of partnerships. There are primary limited partnerships, which are also called original partners; common limited partnerships, which are also known as ordinary members; exclusive or common limited partnerships, which are partners with the right to participate in and vote on all matters affecting the partnership; and common limited partnerships, which are ones in which all the limited partners to participate in the partnership’s business. The nature of each of these types will depend on the state’s laws. Some of them, such as the exclusive or common limited partnerships, are described below.
A primary limited partnership is one in which the general partner and the limited partners both participate in the partnership’s management and the partnership’s activities. Like the general partner, they have limited control over the partnership’s equity, resources and liabilities. Their rights are also limited. The partners must pay their annual management fees. The partnership’s property, assets and liabilities are jointly controlled by the limited partners. The limited partners contribute their portion of the partnership’s earnings, but are under no obligation to contribute to its balance.
A general partner is one who has the right to act on behalf of the partnership and is entitled to invest the partnership’s earnings and funds. He doesn’t have any share or right to the partnership’s income, wealth or property. He can manage the partnership’s business and decide the partners’ retirement and investment objectives. The general partner may be a member or an affiliate of one or more limited partners.