Limited Partnerships:Should I form a Limited Partnership?
Advantages and Disadvantages
A Limited Partnerships
, one or more general partners manage the business while limited partners
contribute capital and partake in the profits and/or losses but take no part in running the business. In a Limited Partnership
the general partners remain personally liable for partnership debts while limited partners incur no liability with respect to partnership obligations beyond their capital contributions. The major purpose of this form of business entity is to encourage private investors to invest without risking more than the capital they have contributed.
Because the Limited Partnership is not a taxpaying entity, losses from the business can be passed on to the owners' personal tax returns, where they can offset other passive income that the limited partners might have. The general partner's losses are not usually considered passive, so they can be used to shelter other income up to the value of the partner's investment in the partnership.
Limited Partnership Advantages
- Limited partners have limited personal liability for business debts as long as they don't participate in management
- General partners can raise cash without involving outside investors in management of business
Limited Partnership Disadvantages
- General partners personally liable for business debts
- More expensive to create than general partnership
- Suitable mainly for companies that invest in real estate
Federal Tax Forms forLimited Partnerships
- Form 1065: Partnership Return of Income
- Form 1065 K-1: Partner's Share of Income, Credit, Deductions
- Form 4562: Depreciation
- Form 1040: Individual Income Tax Return
- Schedule E: Supplemental Income and Loss
- Schedule SE: Self-Employment Tax
- Form 1040-ES: Estimated Tax for Individuals
Creating a limited partnership is done at the state level. Each state has its own rules and regulations, but in general you must pay a fee and file papers with the state, usually a "certificate of limited partnership". This document is similar to the articles filed by a corporation or an LLC and includes information about the general and limited partners. Filing fees for LPs and LLPs are similar to those for corporations and LLCs.
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