A limited partnership is a type of business rule that involves several people. Many people choose to have this arrangement for their company, and from what it seems, it can be quite successful. Today we are going to look at a limited partnership definition and learn how to start one on your own.
Limited Partnership Definition
A limited partnership (LP), also called a limited liability partnership (LLP) takes place when 2 or more people unite to conduct a business together. What’s more important here is that one or more partners are liable only depending on the amount of money they invested. Here, limited partners don’t receive any dividends, but they do have direct access to the income and expenses. The main advantage of this type of organization is the fact that the owners aren’t usually liable for whatever debts the company may have.
Limited Partnership Details
Usually, it’s formed by minimum one general partner and minimum one limited partner. The general partners have control and manage the partnership, being liable for all the debts and obligations. On the other hand, limited partners can’t control or take part in the management of the partnership. Moreover, as previously stated, they are liable up to the sums they invested. Moreover, they can’t withdraw the investment without the agreement of the general partners.
All the partners get to benefit from the profits, capital gains, investment credits, or accelerated depreciation. However, the general partners get some management fees as well. You need to know that a limited partnership can be formed by any type of business. Even so, they are most popular in movie-making, oil and gas exploration, real estate development or equipment-leasing industries. Usually, when the business starts to make taxable profits, people end the limited partnership and start reorganizing the business as a regular limited company.
Here you can get more information about a limited partnership:
How to Start a Limited Partnership
Now that you know the limited partnership definition, you should also know how to start one. There are a couple of steps you need to follow if you want to set up a limited partnership, which we describe as follows:
1. Choose a Name
You may think this isn’t the most important thing about a company, and you’re right. However, most states will ask you to register a DBA (Doing Business As) name if you don’t use your personal name. As such, before filing for a certain name, do some research and see if the name is available. There are also some rules instated by the U.S. Patent and Trademark Office, so make sure you don’t violate any of them.
2. Draft an Agreement
Naturally, the next thing you need to do is to draft a limited partnership agreement. Some states don’t make it mandatory, but it’s recommended in any case. There can be some standard terms of a limited partnership in certain states, so make sure you’re ok. Here are a couple of things you should include:
- Loss distribution;
- Participation rights;
- Asset distribution;
- Profit sharing;
- Distribution prevention;
- Asset appraisal and expulsion;
- Buyout agreement;
- Addition of partners.
3. Choose a Registered Agent
Some states ask every business to have a registered agent in their state. This must be an individual resident or another business entity that has the right to conduct business there. It’s required to have a physical street address in that state.
4. File a Certificate
This certificate is a generalized form which you must fill with basic information, such as the agent name and address, entity address, names of the partners, etc. It’s mandatory to file the certificate with the state, and you can find forms online at the local website.
5. Register for an Employer Identification Number
Also called a Federal Tax Identification Number, the Employer Identification Number (EIN) is, in fact, a nine-digit number given by the IRS. They use it to identify a business when they need it for taxes. You will further need it to create a business banking account, to make transactions or to hire employees. You can find an online application for it or you can file the IRS Form SS-4.
6. Get a State ID Number
Besides the EIN, some states ask you to get a state ID number. It also helps to classify the business for tax purposes. If necessary, you can get it from the Department of Revenue in your state.
7. Get the Necessary Licenses and Permits
For certain companies, the authorities require permits and other similar licenses. As such, you may need a trade or occupational licenses, health or zoning permits, etc. The U.S. Small Business Administration website holds all the information you need regarding federal and state business licenses.
8. File for a Foreign Limited Partnership
You already know the limited partnership definition, but what about a foreign one? A Foreign Limited Partnership is a limited partnership that wants to apply for this quality in another state. Usually, most states ask foreign LPs to have a separate Foreign Application for Registration, besides the Certificate of Limited Partnership. For this, you need to identify the principal executive officers, as well as the registered agents.
You may also need a Certificate of Good Standing for the businesses that apply for a Foreign Limited Partnership. This certificate checks if the business exists and that it’s okay with all the dues, filings, and taxes.
9. Worker’s Compensation Insurance
Besides all the paperwork we described above, you need to offer workers’ compensation insurance for all the employees. The Department of Industrial Relations oversees the process of informing you if there is any insurance required. Moreover, they can help you find insurance providers in your state.
To draw a conclusion, the process of filing for a limited partnership is rather complicated. However, you can find all the information you need online or you can call the state authorities and ask. Even though you need plenty of paperwork, many people consider this is the best option when setting up a business. Make sure you have all the necessary information and look for a proper name for your business.
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