Choosing a business structure is one of the most important steps in starting a business. It determines how you plan to run your company — including how much ownership and liability you and your partners are comfortable assuming. As the SBA says, “You should choose a business structure that gives you the right balance of legal protections and benefits.”
One common business structure many are choosing today is a limited partnership, which is essentially a general partnership with more (limited) investors. Here’s everything you should know about a limited partnership.
[Read: What Is a General Partnership?]
What is a limited partnership?
A limited partnership is an agreement between two or more people running a business together with varying levels of liability and ownership. Essentially, the more liability you have in a limited partnership, the more say you have in how the business operates.
In a limited partnership, there are both general and limited partners:
- General partners are liable for all debts and obligations of a business.
- Limited partners are only accountable for the amount they’ve invested in a company.
As with every business type, a limited partnership comes with both advantages and disadvantages.
Pros of limited partnerships
Depending on the type of business you’re looking to operate, you might consider a limited partnership. Some pros of this arrangement are:
- Growth is scalable. With a solid business idea and plan, and a team of general partners playing a more active role than limited partners, limited partnerships are relatively easy to scale up in size.
- Limited partnership shares are considered securities. In other words, shares of a limited partnership can be sold to help raise capital — without going public.
- Limited partners have limited liability for losses. As a limited partner, you are only accountable for the amount of money you’ve chosen to invest in the business. So, if your company gets sued, you won’t be responsible for paying hefty funds like general partners. You get to decide how involved you are in the business, both physically and financially.
- Partners can be quickly replaced. If a limited partner decides to leave the business suddenly, management can easily and quickly find a replacement for them. This not only prevents turnover issues but also makes limited partnerships more attractive to venture capitalists.
- Two heads are better than one. Having constant input and support is invaluable in business. While you can certainly run a company on your own, it’s always helpful to have another perspective.
Generally, a limited partnership is ideal for business owners who anticipate going into business alone, but could use a bit of financial support.
Cons of limited partnerships
Before deciding whether a limited partnership is right for you, you’ll want to consider their cons. Some major concerns include:
- General partners are personally responsible for business debts and risks. As a general partner, all the debts and risks fall onto you. If someone slips up, or your company is sued, you’re the one accountable for the consequences.
- Profits are treated as personal income. That being said, you’ll have to file tax returns based on your profits.
- Fundraising is difficult. Limited partnerships automatically come with liabilities, meaning not many people will want to invest and assume a share of debt. This makes funding especially challenging.
[Read: Still Not Clear on the New Tax Laws? Here's How They'll Affect Your Business]
Is a limited partnership right for you?
Generally, a limited partnership is ideal for business owners who anticipate going into business alone, but could use a bit of financial support. For instance, if you originally intended starting a sole proprietorship or general partnership, you likely feel comfortable assuming most of the liabilities in your business. Deciding on a limited partnership will allow you that same freedom and independence, with more access to less complex funding from investors.
There’s no right or wrong when choosing a business structure, but you should take the time to consider the pros and cons of each before making a decision. Ultimately, you’ll want to pursue an arrangement that makes the most sense to you and your goals as an entrepreneur.
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