A limited partnership is a specific type of business partnership that enables limited partners to achieve legal protection against unlimited individual liability for the debts and losses of the partnership. Limited partnerships differ from other partnerships in that they allow all limited partners to enjoy limited liability. The extent of the limited liability depends on each individual partner’s investment contribution to the business.
A limited partnership is formed by at least two people, one of whom must be a general partner and one of whom is the limited partner. Of course, a partnership can include any number of partners, but at least one must be a general partner, who operates the partnership on a daily basis.
Pennsylvania limited partnerships are governed by the Pennsylvania Revised Uniform Limited Partnership Act.
General partners have management control of a limited partnership. They share the right to use partnership property. They also share the profits of the partnership in proportions that are defined upon the formation of the partnership. Also, they have joint and several liability for the partnership’s debts.
Limited partners, on the other hand, make investments in the partnership but have no voting power or control over its daily operations. What limited partners get for their financial contributions to the partnership is a right to share in the profits and losses, but only to the extent of their contribution.
What are the Requirements for an LP?
In Pennsylvania, the procedure for forming an LP are as follows:
- File a Certificate of Limited Partnership: To form a limited partnership in Pennsylvania, the partners must file a document with the Pennsylvania Secretary of State called “Certificate of Limited Partnership” and pay a filing fee; the Certificate is a form that available online at the website of the Pennsylvania Secretary of State;
- Check the Name of Your Limited Partnership: You must also name the LP and be sure to check that the name of the LP is not used by any other business entity but is unique from among the names of other businesses in Pennsylvania. A name can also be reserved by filling out an Application for Reservation and paying a filing fee;
- Registered Agent: Pennsylvania requires that all partnerships have a registered agent within the State;
- Partner Requirement: Pennsylvania law does not limit the number of partners but does require that limited partnerships have at least one general partner and at least one limited partner. The general partner has control of day-to-day activities;
- File Annual Reports: Unlike some states, Pennsylvania requires all LPs to file a Certificate of Annual Registration with the Secretary of State and pay a filing fee on or before April 15 of the following year.
What Paperwork Do I Need to Form an LP?
To form a Pennsylvania limited partnership, the partners must file a document called the Pennsylvania Certificate of Limited Partnership with the Secretary of State of Pennsylvania and pay a filing fee. The certificate must state the following:
- Name of the LP;
- Address of the office of LP;
- Address of the agents of LP;
- Name and Address of each partner of the LP.
While it is not a legal requirement in Pennsylvania for a limited partnership to have a written limited partnership agreement, it could be very helpful to the partners to have one. The drafting of such an agreement would give the general partners the opportunity to consider what they want to do in certain situations before they arise in the course of doing business. It could help avoid conflicts in the future to have a blueprint to follow when the opportunity for conflict comes up.
Some of the topics that might be covered in a limited partnership agreement are as follows:
- What each partner will contribute to the partnership;
- How profits, losses, and draws will be distributed among general and limited partners;
- The extent of the partners’ authority and management duties;
- What rules will govern decision-making
- When and how new partners will be admitted;
- What will happen in the event that the partnership must declare bankruptcy;
- What will happen if a partner wants to withdraw;
- What will happen in the event of the death of a partner;
- How disputes will be resolved; and
- How and when the partnership might dissolve.
Again, it is not a legal requirement for formation of a limited partnership in Pennsylvania, but a good written partnership agreement can serve certain important purposes. In Pennsylvania there are so-called default rules in state law that can be varied or modified in a partnership agreement.
So, for example, state law may impose a certain fiduciary duty on a general partner that partners can alter if they adopt a partnership agreement. It could be important to review these rules and the ways in which they can be modified with an informed Pennsylvania business lawyer.
In addition, the agreement may prevent the escalation of conflicts and even legal battles in the future. It can also always be changed later if the partners wish or circumstances change. An experienced Pennsylvania business lawyer can meet with the partners and draft a written partnership agreement that meets the needs of their business.
What Are the Record Keeping Requirements?
In a limited partnership, only the limited partners have the benefit of limited liability. Under the Pennsylvania Revised Uniform Limited Partnership Act, the limited partnership must keep the following documents at their registered office or their principal place of business:
- The name and address of each partner;
- A copy of the certificate of limited partnership;
- Copies of the limited partnership’s federal, state and local income tax returns for the preceding 3 years; and
- Copies of any written partnership agreements and of any financial statements of the limited partnership for the preceding 3 years.
What Benefits Does Pennsylvania Give to an LP?
There are several benefits to limited partnership status in Pennsylvania. These benefits are:
- Limited Liability: Limited partner members of the partnership have only limited liability. This means that if the business goes bankrupt, the limited partners would only be liable for debts of the LP up to the amount of money they invested or contributed to the business and not more;
- 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 both the profits and losses.
- Less paperwork: Forming an LP entails less paperwork and bureaucracy than forming a corporation.
What Disadvantages Does Pennsylvania Give to an LP?
Limited partnerships in Pennsylvania can also come with some disadvantages. Some of these are that limited partners have less of a say in the business than the general partners. If they should become active in management of the daily operations of the LP, the general partners may view this as a risk.
In addition, unlike the general partners in the business, limited partners’ income is not considered income for the tax purposes of the LP, so they usually have to pay self-employment tax.
Should I Hire a Business Lawyer?
The law regarding the formation and operation of limited partnerships is complicated. In addition to limited partnerships, there are limited liability partnerships and limited liability corporations. Choosing the right form for your business and preparing the right documentation at the beginning may require the services of an experienced Pennsylvania corporate lawyer
If you need help with the limited partnership laws in Pennsylvania, you should by all means consult with a Pennsylvania business lawyer. Your lawyer will be able to assist you with tasks such as filing, creating documents, and negotiating partnership agreements.