A good investment is one that is profitable. Investing in a company with potential or an already successful company is what a lot of investors are after. That is because by making an investment they can own shares and dividends from the company. To make this possible, investors must take part in a limited partnership agreement. What other things should you expect in a limited partnership agreement? In this article, we have provided some useful information on what you should know about limited partnership agreements. There are also samples below that you can browse through and use as reference.
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What Is a Limited Partnership Agreement?
A limited partnership agreement is a business arrangement between two or more parties, where at least one party has unlimited liabilities. The party with unlimited liabilities is the general partner. The other parties are called limited partners because there is a limit to what they can do in the business. A limited partnership is not to be confused with a limited liability partnership because there is no general partner with the latter type of agreement.
How to Create a Limited Partnership Agreement
Do you know what you need to do to start a limited partnership? If not, then you’ll surely find the following steps useful.
1. Choose a State to Register
The state of your choice should be where the business is located or where you plan to build the business. Every state has different business laws and tax codes so you need to put that into consideration. There are also states that are favorable or offer more advantages to limited partnerships.
2. Complete the Requirements
The requirements for filing a limited partnership varies per state. You’ll have to visit the U.S. Small Business Administration website to know about the specific requirements of your selected state. You also have the option to consult an attorney to learn more about the best state for your business.
3. File a Certificate of Limited Partnership
This certificate must be filed first before the partnership comes into existence. The filling is done in the state where you plan to do business. You must pay a particular fee to file the papers. The certificate includes information about the general partner and limited partners.
4. Write a Limited Partnership Agreement
After completing the preparations, you can now start writing the agreement. You have the option to use a limited partnership agreement template to write your agreement. Or you may write one completely from scratch with the use of agreement samples as your guide. Make sure to identify the general partner and the limited partners, as well as the interest rate for each partner.
What are the other types of partnerships?
Aside from a limited partnership, the other types are general partnership, joint venture, and limited liability partnership.
- General partnership – All partners get equal shares in the business’ profit, managerial responsibilities, and debt liability. In the event that the profit must be shared unequally, the details must be documented in the legal general partnership agreement to avoid disputes in the future and have a partnership resolution in place.
- Joint venture – Just like a general partnership, partners in a joint venture share equal profits and responsibilities. However, it is only valid until a certain period lapses or when the project involved is completed.
- Limited liability partnership – In this business partnership, all partners in this type of partnership has limited liabilities. It is unlike a general partnership where one party needs to have unlimited liabilities. It also uses an operating agreement as a key document for internal operations.
What are the advantages and disadvantages of a limited partnership?
The following are the advantages of limited partnership:
- The personal liability of each partner in the business is limited.
- Partners are only liable for the amount they invested.
- A partner cannot lose money that is bigger than the amount they invested because they have protected investment.
- It can easily attract investors.
- Partners of big and small businesses benefit from the profit and losses of the business without participating in the actual business operations.
The following are the disadvantages of limited partnership:
- The debts of a business are the sole liability of the general partner.
- Partners who are active with business cooperation may have general-partner personal liability.
- Before the business partnership comes into existence, it is necessary to file a Certificate of Limited Partnership with the state.
How does a limited partner make money?
Unlike, a collaboration agreement where all parties are expected to collaborate, limited partners are not required to have day-to-day involvement in the company. They also don’t have voting powers. Limited partners invest in a business in exchange for shares. So their means of making money is through their share of profit.
How much interest can a partner have in a partnership?
Taking part in a limited partnership is like making an investment. The contract must state the percentage of ownership for each partner, which is not less than zero. There are also no minimum restrictions on how many shares a partner can own in a business.
Before you start jumping right into a partnership agreement, you should be aware of this type of business arrangement. The information provided above, together with several samples will help you easily understand and learn about a limited partnership agreement.
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