Limited Partnerships

Welcome to The Jayson Law Group LLC‘s series on The Legal Aspects of Starting a Small Business in New Jersey.  In our fourth video we will discuss the Limited Partnership business entity.  Tune in to more videos to assist you in starting your business.

Requirements for Limited Partnerships in New Jersey

A limited partnership, sometimes abbreviated as LP, is a type of business entity.  Unlike general partnerships, which divide control and liability between partners equally, limited partnerships involve general partner, and a limited partner.  While limited partners can contribute to the business by providing resources such as start-up capital or funding for day-to-day expenses, it is not the limited partner’s role to be present on a daily basis directing the flow of operations.  That is the general partner’s role.

Like general partnerships, LPs are governed by partnership agreements, which are essentially contracts outlining how the business will be run.  However, unlike general partnerships, LPs must be registered with the state. Therefore, if you want to create this type of business, you’ll have to file a certificate with New Jersey.

Pros and Cons of Limited Partnerships

Like any type of business structure, limited partnerships come with unique benefits and drawbacks.  Before you decide to open up one of these partnerships, it’s important to weigh the pros against the cons to determine if this sort of entity is a suitable fit for your goals.

What Are the Positives?

  • LPs offer personal liability protection for limited partners.  Generally speaking, limited partners are not liable for the obligations of the business, unless the limited partner becomes the general partner and takes control of the partnership.
  • The general partner is able to maintain control of the business.  If a hands-on approach appeals to you, this might be a very favorable arrangement.
  • LPs are flow-through entities, also referred to as pass-through entities.  This means that only the actual partners are taxed, not the business itself.  However, you should consult with an accountant for more in-depth taxation information.
  • If a limited partner leaves, the LP will not automatically dissolve, provided there are additional limited partners.  However, this can also be a negative, as discussed below.

What Are the Negatives?

  • While general partners enjoy greater managerial power, the downside is that unlike limited partners, general partners do not have personal liability protection.  Therefore, if you are a general partner, and the partnership is sued, your personal assets can be levied upon by a plaintiff.
  • There are some circumstances in which a limited partner could have personal liability for debts incurred by the business.  For more detail, you should speak with an accountant as well as a commercial litigation lawyer.
  • As mentioned above, LPs do not automatically dissolve if one among multiple limited partners leaves. While this can be a positive in terms of continuing the business, it could also be a negative if there is any conflict or tension between the remaining partners.

If you’re thinking about creating a limited partnership in New Jersey, an experienced business attorney can help you get started.  To set up a legal consultation, call The Jayson Law Group LLC at (908) 258-0621 today.

Video transcript

Today, we’re going to continue our exploration of partnerships by looking at limited partnerships. And what is a limited partnership? It is a type of business entity where there is a general partner and a limited partner. However, unlike partnerships that do not have to be registered with the state, limited partnerships must file a certificate with the state of New Jersey.

The benefits of a limited partnership

So then what are the benefits or pros of a limited partnership? It offers protections from personal liability and this protection of personal liability extends to the limited partners. Limited partners are not liable for the obligations of a limited partnership unless that limited partner is also the general partner or if the limited partner takes control of the business. It allows the limited partner to contribute resources to the business – start-up capital, for the operations – but they cannot be there for the day to day operations of the business. That is not what a limited partner does.

Another positive aspect of a limited partnership is that it allows for the general partner to maintain control of the business. So, if you form a limited partnership and you are the general partner, you are these every day to run the business.

Like a partnership is a pass through entity meaning that only the partners are taxed and not the business.

Limited partnerships, like partnerships, are governed through partnership agreements which are contracts between the partners about how the business should be run and may have other aspects of the business in the partnership as the partners agree.

If a limited partner leaves, the partnership is not dissolve, but that requires multiple limited partnerships because a partnership requires more than one. At that point it would just be a sole proprietorship and since it doesn’t automatically change, that limited partnership would be dissolved.

The drawbacks of limited partnerships

What are some of the negatives of limited partnerships? Well, if you are the general partner in a limited partnership—just like in partnerships or sole proprietorships – you have no protections at all. Which means that if the partnership is sued, theoretically, the general partner is also being sued and any monies owed by the partnership can be levied upon by the plaintiff to the general partners personal assets.

There are certain situations where the limited partner can be liable, but that’s kind of a deeper conversation and I suggest that you speak with an attorney should you decide to form a limited partnerships about the limitations to the general partner.

The partnership ends when it is dissolved. When the limited partner leaves, the partnership does not end, but if you have multiple partners and one decides to leave, it doesn’t end the partnership. That means if you had disputes or disagreements, you still have to deal with those remaining partners since it does not dissolve when one partner leaves.