To better understand what a limited partnership is, it is good to know what a partnership is in general.
A partnership is an association of two or more individuals to carry on a business for profit as co-owners. A partnership is formed when the parties to a business can share in the profits and if they have a right to control the business. Those parties will then be said to be partners.
There are three kinds of partnerships:
- General partnerships,
- Limited liability partnerships (i.e., LLPs), and
- Limited partnerships
The type of partnership formed will determine the amount of liability that an individual partner may face as part of the partnership.
What Is an LP?
An LP or Limited Partnership is a way of structuring a business that supplies limited liability to its members (partners) and the structural and tax flexibility of a partnership. The limited liability aspect of the LP defends the assets of its limited partners from the debts, losses, and legal claims related to the limited partnership but not the assets of general partners. Furthermore, like partnerships, LPs are free of many of the organizational requirements of corporate and corporation taxes.
Although it is called a limited partnership, each limited partnership requires at least one general partner to be considered adequately formed. The general partner will be liable for making management decisions for the limited partnership and its day-to-day operations.
A limited partner only has limited powers over the partnership and can only be held liable to the extent of their investment in the limited partnership. Therefore, they are primarily liable for investment duties relating to the limited partnership.
Is it Possible to Withdraw From a Limited Partnership?
Unlike a general partnership, a partner in a limited partnership may withdraw from the business without subjecting it to an automatic dissolution. This is just one of the essential features distinguishing a limited partnership from a general one.
When a limited partner chooses to withdraw from a limited partnership, the partner will be required to inform the partnership and file the necessary paperwork (i.e., documents associated with the withdrawal) with the State. Furthermore, the rest of the partners in the limited partnership will have to buy out the withdrawing partner.
In contrast, when a partner withdraws from a general partnership, it will usually result in that partnership’s dissolution (termination). A general partnership can also dissolve when its partners become either deceased or incapacitated.
What If I Have a Dispute That Involves a Limited Partnership?
As discussed above, one of the primary elements that separate all three partnerships is the amount of liability that can be attributed to each partner. This will help resolve which of the partners should be held liable for the financial losses of the partnership.
Typically, limited partners are only liable to the extent of their investment in the limited partnership. Nevertheless, suppose a partner acted outside the scope of their duties as a limited partner. In that case, they will likely be held personally liable for any injuries or losses they caused.
For instance, suppose a limited partner attempts to hold themself out as if they are a general partner and starts making management conclusions or represents as much to a third party. In that circumstance, they could be held personally responsible for their actions.
On the other hand, if the limited partner acts 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 responsible for any injuries or losses.
In some circumstances, multiple partners may be jointly liable either to the partnership or held responsible for paying damages awarded to a plaintiff. This will depend on the individual facts surrounding the case and the liability agreement created between and entered into by a partner and their partnership organization.
What Are the Requirements for an LP?
An LP can only be formed under state law. As a result, the requirements and protections for LPs can differ widely from state to state. While there is a lot of flexibility in developing and structuring LPs in Iowa, there are a few mandatory requirements:
- Choose a name for the LP: This name must be different from all other business names on record at the Iowa State Corporation Commission and must include either “limited partnership” or the abbreviation “L.P.” or “LP.”
- Choose a registered agent: Iowa demands that every business entity have a registered agent to ensure that any critical information or legal problems make it to the LP. A registered agent can be an Iowa resident or an Iowa corporation.
- Signature of General Partner: All LPs must have at least one general partner that is personally liable for the actions of the LP.
- Certificate of Authority: The Secretary of State provides a PDF fillable Certificate of Authority. This document requires the name of the LP, the principal office of the LP, the name of the registered agent, the principal office address of the LP, general details on all general partners, and the business address of the registered agent (must be in Iowa).
- Copy: A complete copy of the Certificate of Authority must be provided to the Secretary of State at filing.
- Partnership Agreement Optional. Iowa does not require a partnership agreement, but such an agreement is a good idea to resolve issues such as partner contributions, distribution of profits, partners’ authority, etc.
What Paperwork Do I Need to Form an LP?
The forms required to form your business as an LP can be found on the Secretary of State’s website. The Certificate of Authority and a processing fee can be filed with the Secretary of State.
What Benefits Does Iowa Give to an LP?
There are several reasons why you might want to structure your business as an LP:
- Limited Liability: Like a corporation, LPs shield the personal assets of their limited partners from the debts and legal liability of the company. Nevertheless, a limited partnership must have at least one general partner that is personally responsible for all claims made against the LP.
- Pass-Through Tax Entity: LPs are taxed as a pass-through entity and avoid the double tax associated with corporations. This means that the LP itself is not taxed. Rather, partners are taxed according to their tax bracket when they obtain a share of the LP’s profits.
- Biennial Report: LPs are not required to file biennial reports in Iowa.
- Survivability: Unlike a general partnership, LPs do not have to be reformed every time a partner dies.
- Late Filing: An existing general partnership can convert to a limited partnership if it satisfies the requirements listed above.
What Disadvantages Does Iowa Give to an LP?
While the limited liability and ability to avoid the double tax associated with a corporation can be attractive, there are a few drawbacks to structuring your business as an LP:
- Filing and Fees: Unlike a general partnership or sole proprietorship, LPs need filing formation forms and payment of some administrative fees, which can cost upwards of $100 for initial filing and may require hiring a lawyer.
- General Partner Liability: Unlike a limited liability company or a limited liability partnership, a limited partnership requires at least one general partner that is personally liable for the claims made against the LP.
Should I Hire a Business Lawyer?
If you are looking for an attorney to help you structure your business, contact a local Iowa corporate lawyer today to get the help you need. Choosing the right structure is critical to the success of your business, so consult an attorney to properly start your business today.