When starting a new business venture, a limited partnership can be a good choice as an entity. You can raise capital to fund the venture without giving up control of the business or being saddled with considerable start-up debt.
A limited partnership will enable you, as the general partner, to manage and operate the business with little intervention from the limited partners.
In addition, a limited partnership enables you to raise capital from investors who receive limited partnership interests in exchange for their contributions. As limited partners, they will be able to share in the entity’s financial results without having to manage the business or risk personal liability for it.
Care must be exercised to ensure that the limited partners do not inadvertently lose the protection of limited liability by participating in the management of the business.
Merely consulting with you will probably not result in personal liability as long as you remain the ultimate decision-maker as general partner. A limited partner may become personally liable by taking certain actions such as guaranteeing a partnership debt.
General Partner Liability
One drawback to a partnership is that you, as general partner, will be personally liable for the entity’s debts. This is the price a general partner must pay in exchange for the right to operate and manage the enterprise.
The risk of this liability can be minimized somewhat by:
- Creating a corporation to manage the partnership and serve as general partner, and
- Procuring adequate insurance to cover potential liabilities arising from operation of the business.
Tax Considerations for Limited Partnerships
Since the partnership is a pass-through entity for tax purposes, each partner will receive a K-1 and must include his or her share of partnership income, deductions, credit, and loss, on their individual tax return.
To the extent the income is qualified business income, the partners will be eligible to take the qualified business income deduction.
Tax Differences of Limited Partnership vs. C Corporation
If the business was a “regular” corporation instead of a partnership, the earnings would be taxed at a higher effective tax rate. With a corporation, earnings are taxed once when earned by the corporation and again when distributed to shareholders.
With proper planning, the limited partnership can be structured to provide special allocations of various tax benefits that make the venture more attractive to prospective investors.
For this reason, a limited partnership may be a better choice for your new venture than an S corporation. To be respected by the IRS, special allocations must have what is known as “substantial economic effect.” We can help you determine the special allocations that your limited partnership needs.
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About Smith Patrick CPA
Smith Patrick CPA is a St. Louis-based, family-owned CPA firm dedicated to providing personal guidance on taxes, investment advising and financial services to small businesses and financially active individuals. For over 30 years, our firm has focused on providing excellent service to businesses, non-profits, individuals and government agencies in St. Louis and the surrounding areas. Investment Advisory Services are offered through Wealth Management, LLC, a Registered Investment Advisor.