Part 1
When starting a business, many individuals encounter the same issue: whether to use a limited partnership or a limited liability corporation. Each structure has its own pros and cons which will be explored so that you can make more informed decisions moving forward. This topic will be spread out over two posts. This post will be covering the advantages and disadvantages of using a limited partnership (LP) whereas the next one will address limited liability corporations.
What is a Limited Partnership?
Limited partnerships involve general partners and limited partners. Each category can be comprised of one or more individuals. General partners are responsible for the day-to-day operations as well as the debts and liabilities incurred by the company. On the other hand, limited partners are purely investors. Therefore, a limited partner cannot be held liable for the debts acquired by the company beyond the amount that they contributed.
Advantages of an LP Structure
- Limits the liability for investors. As mentioned above, a limited partner’s liability for the company’s debt is limited to the amount of many that they invested in it. Therefore, a business creditor cannot come after the limited partner’s personal assets.
- General partners are in charge. What this means is that general partners don’t need to consult the limited partners when making business-related decisions. As a result, this contributes to increased efficiency.
- Limited partners are replaceable. If a limited partner chooses to leave or needs to be replaced, they can do so without dissolving the partnership. In turn, this mitigates much of the complication regarding this matter.
- Good investment opportunity. Investors can benefit from the profit and losses of a business without actually having to get involved in the business.
- Unlimited amount of limited partners. This translates to an unlimited cap on capital acquisition.
- Can cap the investors’ returns.
Disadvantages of an LP Structure
- Lack of distinction. There is no legal distinction between the general partners and the business itself. Thus, general partners carry the burden of all the business debts and obligations. In the event that the company is sued or enters into bankruptcy, all liability is handed over to the general partners.
- Limited partners cannot be involved in the business. This is a definite cause for concern and if it occurs, the limited partner can no longer keep their position.
- Each general partner has the ability to make decisions. Because they make decisions on behalf of the partnership, the rest of the general partners are automatically responsible for said decisions. In situations like these, it is therefore very important to keep communication channels open and consistent.
- Detailed agreement is required. As a result, this can be very costly depending on the details of the LP. To many soon-to-be companies, this is often a major factor in considering the formation through a limited liability corporation and an LP.
If you’re at a crossroads with deciding between using an LP or a limited liability corporation, it is always advisable to seek legal consultation. The team at Sodagar & Co. understands that this is a difficult and significant decision to make that will impact your future. We have the resources and experience to help you make the choice best-suited for your needs and goals.
To read part 2 of this post, please click here.
