Partnerships are one of the most commonly formed business entities. Unlike a general partnership, a limited partnership (LP) allows a business to have both general and limited partners. A general partner takes an active role in the business’ management. A limited partner is comparable to a “silent investor”—he or she invests in the partnership, but does not actively participate in the business’ operation.
The process of forming a limited partnership varies from state to state. In Hawaii, the Uniform Limited Partnership Act governs the creation and management of LPs. The Department of Commerce and Consumer Affairs is responsible for the registration of limited partnerships.
In Hawaii, a limited partnership must have at least one general partner and one limited partner. If your partnership operates under an assumed name (something other than the partners’ surnames), you must register the business’ name with the state. Additionally, you must designate your business’ limited partnership status by putting “L.P.” after its name.
Finally, you must designate a registered agent for your LP. A registered agent is someone who is authorized to accept important documents (like paperwork initiating a lawsuit) for your business. Your registered agent must be physically present in the state of Hawaii. If you need help selecting a registered agent, a business lawyer can help you with the process.
To create a limited partnership, you must file a Certificate of Limited Partnership (Form LP-1) with the Department of Commerce and Consumer Affairs. This form can be submitted either online or by mail.
You must provide the following information on your Certificate of Limited Partnership:
- The name of your partnership,
- The business’ physical address,
- The name and address of your registered agent, and
- The names and addresses of all the LP’s general partners.
You may have to file additional paperwork if you plan on operating your business under an assumed name.
In addition to your state filing, you should consider drafting a partnership agreement. A partnership agreement defines the rights and responsibilities of both general and limited partners. For example, a partnership agreement may set out the procedures for profit distribution, dispute resolution, and terminating the partnership.
Limited partnerships have specific benefits. First, an LP does not have to file taxes. Instead, its income passes through to its partners (who must report this income to the IRS and pay taxes).
And, if you are a limited partner, you may not be personally liable for the business’ debts and other financial obligations. As long as a limited partner does not take an active role in the partnership’s management, your personal assets cannot be collected to satisfy the LP’s debts.
General partners, however, are personally liable for the business’ debts and other obligations (such as legal judgments). This means that a general partner’s personal assets can be seized to collect a debt or judgment against the LP. If you form a limited partnership, general partners should consider purchasing liability insurance to help offset this risk.
Alternatively, you can consider creating a limited liability partnership (LLP). In an LLP, all partners have limited liability protections. However, different rules and procedures apply to LLPs in Hawaii. A business lawyer can help you decide which business structure is best for you.
While completing a form is a simple process, a lot more goes into the structuring of a limited partnership. For example, you should create a legally binding partnership agreement, evaluate liability insurance policies, and may have ongoing reporting and other legal obligations. A Hawaiian business lawyer can help you follow the correct procedures and protect your limited partnership.