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Limited Partnership (LP)

Candlefocus Editor
A limited partnership (LP) is a business arrangement for two or more owners who come together and form a legal entity to conduct business. Unlike a sole proprietorship or general partnership, an LP has two classes of partners: limited partners who do not have any authority to control business operations and are only liable for debts and obligations up to their initial investment and a general partner who is liable for all business debts and obligations and has corresponding authority to manage and control the partnership. An LP is a pass-through entity meaning that any profits earned by the partnership are passed through to the partners who then pay personal income tax on their profits and must report the income on their individual tax returns.

In addition to having general and limited partners, LPs are also required to have a formation document, most commonly known as a limited partnership agreement. This agreement is created by the founders of the LP and outlines the specific rights and responsibilities of each partner. These often include distribution of profits and losses, duties and obligations of all partners, as well as procedures for dissolution, termination, or withdrawal of a partner. It is essential that this agreement be in writing and clearly state the rules of the partnership in order to avoid potential legal complications and disputes down the line.

In the United States, LLP formation is regulated at the state level. For a partnership to be considered a Limited Partnership all partners must register with the Secretary of State in the state in which the partnership does business. Most states also require an LP to submit annual reports about their business operations and include details such as the number of partners, a description of the business, and any other changes in the business since the original formation.

Overall, limited partnership agreements offer an attractive alternative to other business entities because of their limited liability feature. Limited partners in an LP enjoy the protections afforded to any limited liability business, while the general partners take on all responsibility and liability for the business operations. They also attract investors due to their low filing and operating costs and valuable pass-through taxation benefits.

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