A limited partnership is a type of business partnership that includes at least one general partner and one limited partner. The limited partners have limited liability for the debts and losses of the partnership; their liability is limited to the value of the individual limited partner’s contribution to the business.
The liability of the general partners is not limited, but the general partners have the right to to manage the daily business operations of the partnership. A limited partnership in Maryland is taxed the same way as a general partnership.
Maryland has three other features to protect partners in limited partnerships from liability as follows:
- A corporation may serve as the general partner, so that only corporate assets are at risk;
- Limited partnership agreements may indemnify partners, employees, and agents of the limited partnership for all acts except fraud and reckless conduct;
- A limited partner may act as an officer, director, or shareholder of the corporate partner without subjecting themselves to liability as a general partner, so long as a creditor does not have a “reasonable belief” that, based upon his conduct, the limited partner is in fact a general partner.
What Are the Requirements for an LP?
In Maryland, the following steps are required to form an LP:
- File a Certificate of Limited Partnership: To form a Maryland Limited Partnership, the partners must file a document with the State Department of Assessment and Taxation (SDAT) called “Certificate of Limited Partnership”; this can be done online;
- Check the Name of the Limited Partnership: The name of the LP must be checked to ensure that no other business is using the name and that it is unique; also in Maryland; the name of the limited partnership must contain either the words “limited partnership”, or the abbreviation “L.P.” or “LP”.
- In addition, the name of the limited partnership may not contain the name of a limited partner, unless that is also the name of a general partner, or unless the business of the limited partnership had been carried on under the name of a limited partner before the limited partner was admitted;
- No Written Agreement Required: A written partnership agreement is not legally required, but as detailed below, the partnership may want to have a partnership agreement;.
- Partner Requirement: Maryland law does not limit the number of general or limited partners but does require that there is at least one general partner and one limited partner. The general partners control the day to day activities;
What Paperwork Do I Need to Form an LP?
To form a Maryland limited partnership, the partners must file a “Certificate of Limited Partnership” with the SDAT and it must state the following:
- The name of the LP;
- The address of the main office of LP in Maryland;
- The name and address of the resident agent of the limited partners;
- The name and address of each general partner;
- The latest date upon which the limited partnership is to dissolve.
- In Maryland, a limited partnership’s resident agent must be one of the following:
- a citizen of Maryland who resides in Maryland;
- a Maryland corporation;
- a Maryland limited liability company.
Once the state has approved the paperwork and returned a certified, stamped copy, the partnership may begin operations. There are a few things that the general partners may wish to do before getting underway. They are not legally required; they are only recommended practices:
- Open a bank account in the partnership’s name to keep its liability protection in tact;
- Have a physical address where the business can receive mail and legal notices;
- While it is not required by Maryland law, it is probably best practice to have a written limited partnership agreement drafted. The exercise of drafting the agreement for a limited partnership gives the partners the opportunity to think about the problems that might arise and how they want to deal with them when they do.
It is best to have a partnership agreement drafted and signed by the general partners when the partnership is first formed. This ensures that the partners develop a common understanding of the expectations with respect to each other and the business.
Among the topics that a partnership agreement can address are how the company will be managed, and the rights and obligations of the partners. Other topics to address are:
- How partners, both general and limited, can withdraw from the partnership;
- How new partners will be admitted;
- What will happen if a partner dies, becomes disabled or goes bankrupt;
- How and when a partner can be ejected;
- Under what circumstances the partnership will dissolve.
- How and when interests can be sold or otherwise transferred;
- How disputes will be resolved;
- How the affairs of the partnership will be wound up.
Some states have so-called “default rules” that apply in the absence of a partnership agreement. This is another reason to have an agreement. A written agreement can modify the default rules when situations dictate that it would be in the best interests of the partners to do so.
Provisions setting forth when, how and to whom interests in the partnership may be sold or transferred can avoid problematic scenarios. If properly drafted, the provisions of the agreement can enable existing partners to retain their percentage stake in the partnership and protect them from unwelcome new partners.
There are other compelling reasons to have a written partnership agreement. An experienced Maryland business lawyer can advise start-up partners of the issues the agreement should address.
What Benefits Does Maryland Give to an LP?
There are several benefits of having a limited partnership in Maryland that other states may not offer. These benefits are:
- Limited Liability: Limited partners who form an LP and contribute money enjoy limited liability. This means that if the business goes bankrupt, the limited partners would only be liable up to the amount of money they invested in the business;.
- Tax Benefits: The profits and losses in an LP flow through the business to the partners, all of whom are taxed on their personal income tax returns and share the profits and losses.
- Less Paperwork: Formation of an LP involves less paperwork than formation of a corporation;
- Corporate Partners: A corporation may serve as the general partner, so that only corporate assets are at risk;
- Indemnification of General Partners: Limited partnership agreements may indemnify partners, employees, and agents of the limited partnership for all acts except fraud and reckless conduct, but there has to be a partnership agreement for this;
- Limited Partner Participation: A limited partner may act as an officer, director, or shareholder of the corporate partner without subjecting themselves to liability as a general partner, so long as a creditor does not have a “reasonable belief” that, based upon his conduct, the limited partner is in fact a general partner.
What Disadvantages Does Maryland Give to an LP?
Limited partnerships in Maryland do have some disadvantages. Of course, limited partners may not become involved in the day-to-day operation of the business. If they should become active in the LP, the general partners may view this as a risk.
A limited partnership may not be the best option for the business that a group of people want to initiate. They may want to consult an experienced business lawyer to ensure that the limited partnership is the best structure for them and to review tax considerations as well.
Should I Hire a Business Lawyer?
The law surrounding the requirements and protection of limited partnerships can become complicated. The situation of each limited partnership can be unique. Limited partnership law varies from state to state. It’s in your best interests to hire a local Maryland corporate lawyer if you need help with the limited partnership law in Maryland.
A local business lawyer knows the law in Maryland and will be able to assist you with tasks such as filing, creating documents, and negotiating and drafting partnership agreements. You are most likely to have the best possible start to your limited partnership with an experienced Maryland business lawyer working on your side.