How to Form a Limited Partnership (LP) in Delaware

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 What Is A Limited Partnership?

In terms of business management structures, a partnership is an association of two or more people who carry on as the co-owners of a business for profit. More specifically, a partnership is formed when the parties to a business can share in the profits, and if they have the right to control the business.

There are three different types of partnerships: general partnerships, limited liability partnerships (LLPs), and limited partnerships (“LPs”). The specific type of partnership that was formed will determine the amount of liability that an individual partner may face as part of the partnership, as well as other factors such as how the business is to be taxed.

A limited partnership is a specific type of business partnership that allows its limited partners to receive certain legal rights which protect against individual liability claims. These claims may be for various reasons, such as debt, losses, or violations directly associated with the overall limited partnership.

Alternatively, in a general partnership, each partner is held both individually and jointly responsible for the losses incurred by the partnership. This fact can sometimes put partners at a disadvantage, especially if they have a considerably limited role in the partnership. This would also put them at a disadvantage if they have contributed fewer funds to the business than the other general partners.

While the structure is referred to as a limited partnership, each limited partnership requires at least one general partner in order to be considered properly formed. The general partner will be responsible for making management decisions for the limited partnership, as well as its day-to-day operations.

Because a limited partner only has limited powers over the partnership, they can only be held responsible to the extent of their investment in the limited partnership. This means that they are largely responsible for investment duties that are associated with the limited partnership.

How Do I Form A Limited Partnership In Delaware?

The process for creating a limited partnership varies from state to state. To reiterate, an LP must have two or more owners who are also known as partners. At least one of these partners must be a limited partner, and one must be a general partner.

You will need to obtain a registered agent who can receive important legal documents on behalf of the LP. However, the agent must be a resident of the state, or another company. Finally, you will need to select a name that is not already being used by another company. This name must include either “L.P.”, “LP,” or “Limited Partnership.”

In the state of Delaware, you can register your company as an LP by mailing in or faxing a completed Certificate of Limited Partnership form to the Delaware Division of Corporations. Some examples of what the form requests would be:

  • The name of the business;
  • The office address; and
  • The names and addresses of the registered agent, as well as the general partner(s).

What Are The Advantages And Disadvantages Of Forming A Limited Partnership In Delaware?

Generally speaking, Delaware is a considerably business-friendly state and provides a number of incentives for incorporation in the state. One key benefit would be that the state has a specialized court which is devoted entirely to only business matters. This is called the Court of the Chancery. Along with a specialized court which generally favors businesses, the corporate laws in Delaware heavily favor businesses over individuals.

One of the disadvantages of forming an LP in Delaware would be that you must pay an annual franchise tax. This tax is $300 and must be paid on or before March 1st of each year.

Can I Withdraw From A Limited Partnership?

Unlike a general partnership, a partner to a limited partnership may withdraw from the business without automatic dissolution. When a limited partner decides to withdraw from a limited partnership, they will be required to notify the partnership, and file all of the necessary documents associated with the withdrawal. These must be filed with the state. Additionally, the rest of the partners to the limited partnership must buy out the partner who is withdrawing.

Alternatively, when a partner withdraws from a general partnership, the partnership will automatically dissolve. Additionally, a general partnership can dissolve when any of its partners become either deceased or incapacitated.

To reiterate, one of the defining factors that separates all three partnerships from each other would be the amount of liability that can be attributed to each partner. This will help determine which of the partners should be held responsible for the financial losses of the partnership.

Generally speaking, limited partners are only liable to the extent of the investment that they made to the limited partnership. However, if a partner was acting outside of the scope of their duties as a limited partner, it is likely that they will be held personally liable for any injuries or losses that they caused. An example of this would be how if a limited partner attempts to hold themselves out as if they are a general partner in order to make management decisions, they could be held personally liable for their actions.

Alternatively, if the limited partner was acting within the scope of their duties which are usually set forth by the terms of an entity’s partnership agreement, it is more likely that the overall limited partnership will be held responsible for any resulting injuries. There are some cases in which multiple partners to the partnership may be jointly liable either to the partnership or held responsible for paying damages that are awarded to a plaintiff.

How Will A Partnership Agreement Help My LP In Delaware?

A business partnership agreement is a legal document governing the terms and conditions for conducting business as partners. An agreement outlines the duties and responsibilities of the partners, as well as defines the scope of activity for the partnership. Essentially, it is a contract among the various partners providing legal enforcement for the terms of the business operations.

The agreement may be referred to in order to resolve a dispute or legal issue associated with the activities of the business and the partners. In instances of a lawsuit or a violation, the court may refer to the agreement in order to determine the partnership’s view on certain legal issues.

A partnership agreement should be clearly written, including precise details associated with the company’s activities. Some examples of what a solid partnership agreement should include would be:

  • Each partner’s name and contact information;
  • The duties and responsibilities of all partners;
  • Allocation of profits and losses for the partners;
  • The scope of the partnership’s functions and activities;
  • The partnership’s goals and mission statements;
  • Restrictions on management and leadership; and
  • Instructions for termination and dissolution of the partnership.

Some partnership agreements may also contain a clause which defines what should happen in the event of a legal dispute. An example of this would be how the agreement may state that legal disputes may be resolved by lawsuit; or, that the parties must seek alternative methods first, such as dispute resolution or mediation.

Do I Need A Lawyer To Form A Limited Partnership (LP) In Delaware?

If you want to form an LP in Delaware, you should consult with a Delaware corporate lawyer. An attorney can guide you through the process, and will also be able to represent you in court, as needed, should any legal issues arise.

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