Here in Pennsylvania, there are a number of different business entity types to choose from for your business. You can decide to use a partnership, limited liability company (LLC) or corporation as your entity. One type that we have found works well for our clients is the limited partnership. This is especially true for businesses engaged in real estate development and investment funds. As its name suggests, a limited partnership provides limited liability for certain partners invested in the business. An experienced business attorney can assist you in deciding if it makes sense to form your business as a limited partnership here in Pennsylvania.
What is a Limited Partnership?
A limited partnership is a legal entity formed by two or more persons with one or more acting as general partner and the other persons being considered a limited partner. In a limited partnership, all of the decisions are made by the general partners. The limited partners have no voting power or control over the day-to-day operations of the business. Instead, they receive a share of the profits or losses of the business based on their investment. Each year, the limited partnership is required to provide each limited partner with information on the profit or loss from the business. In addition, the limited partners are shielded from any liabilities of the business. The only risk for a limited partner is the amount of their investment.
While the general partner has the control of the business, it also is exposed to personal liability for the debts and obligations of the business. Therefore, if the business gets sued and loses, the general partner could end up paying some of the damages if there are insufficient assets inside the limited partnership to cover the judgment. This is why many general partners own their interest through another business entity with limited liability, such as a corporation or LLC.
How are Limited Partnerships Formed?
General partnerships are often formed with just a handshake between the partners, or a partnership agreement signed by them. This is not the case with a limited partnership. This is a legal entity formed under the laws of Pennsylvania. Once you and your prospective investors have chosen a name, you will file a Certificate of Limited Partnership. This will contain the name, business address, address of the agent for service of process, and names and addresses of all partners. As with most entities, the list of the partners can be changed from time to time as investors are added or others are bought out. It is a good idea to have this document prepared by your business attorney. You will also have to pay a filing fee for the document.
Once the Certificate has been filed and approved, you will need to obtain a taxpayer identification number from the IRS. This will be necessary to open a bank account and to do business in Pennsylvania. If your business requires any licensing, you will need to apply for them under the name of the limited partnership.
There are also ongoing obligations for a limited partnership. Each year, you will need to prepare and file an annual report with the Pennsylvania Department of State. This must be done on or before April 15 and there is a nominal filing fee. Failure to do so could lead to your limited partnership being administratively dissolved, cancelled or terminated.
What are the Benefits of a Limited Partnership?
There are a number of benefits in using a limited partnership for your business. It all depends on the needs of your business and the goals of you and your investors.
Limited partnerships provide limited liability for limited partners. This gives your investors the peace of mind that they will not be personally at risk for any of the obligations of the business. If something goes wrong, their losses will be limited to the amount of their investment. This is different from a general partner where each partner is personally liable for the debts and obligations of the partnership.
You also get pass-through taxation with a limited partnership. Unlike a Subchapter C Corporation that pays taxes and then has its investors pay taxes on the dividends they receive, a limited partnership is not subject to double taxation. You and your investors will only be taxed on your percentage of any profits of the business. You can also use any losses from the limited partnership to offset any income or profits you receive from other sources.
Business owners also like the flexibility in the allocation of profits and losses among the partners. In a corporation, dividends are distributed based on percentage ownership with very little flexibility. In a limited partnership, you can determine how the results of the business are allocated, set things like preferred returns, and have specialized distributions. This can help make your business a more attractive investment.
The limited partners are not involved in the management of the business. This is another aspect that investors like about a limited partnership. This is why it works so well for real estate and investment funds. For most investors, the biggest concern is getting a return without having to be distracted from their daily lives. This is accomplished by investing in a limited partnership.
How Do You Know if a Limited Partnership is Right for You?
Choosing to use a limited partnership for your business depends on a number of factors. First, it only makes sense if you plan to have outside investors who will not play a day-to-day role in your business. If you are setting up a partnership where every partner will work, then a limited partnership will probably not be right for you.
A limited partnership also makes sense for certain types of businesses. They work well for real estate development as there can be a period where the business is not profitable. For example, the timeline for developing large scale real estate projects like shopping malls and multiple dwelling units can often be quite long. With a limited partnership, this gives you time to get to revenue without constant votes from the investors. The same is true of private equity funds.
They also make sense for these types of businesses as an incentive to investors. During the first few years, the limited partnership will book net losses. These can be carried forward so the limited partners will have little tax liability once the business becomes profitable. This is why limited partnership can be an attractive investment for high net worth individuals.
Contact Our Experienced Pennsylvania Limited Partnership Attorneys
A limited partnership may be the right entity for your business, but its formation can often be complex. This is why the experienced Pennsylvania limited partnership attorneys at Jones, Gregg, Creehan & Gerace can assist you with your business entity needs. Our team can walk you through the process so you and your investors can get the most out of your limited partnership.