General partnerships are often frowned upon as a business entity because they expose the partners to all kinds of liability exposure. The limited partnership may offer a solution to this problem.
A limited partnership is more or less what the name suggests. The business is formed with one general partner and then a group of limited partners. The general partner is responsible for running the business efforts. When people deal with the limited partnership, they are essentially dealing with the general partner and its employees. The limited partners, however, are in a unique position.
A limited partnership provides protection from liability to the limited partners much as you would find with a corporation or LLC. If the partnership is sued for something, the limited partners cannot be named as defendants in the lawsuit. Ah, but there is a tradeoff for this protection. To maintain the liability protection, the limited partners cannot participate in the day to day running of the business. In practical terms, this means the limited partners are essentially the deep pockets for the business. They contribute the funds to get the business up and running, but don’t do much else. You will often see this form of business used for restaurants and other high risk business ventures.
What if you are considering investing in a limited partnership, but also want to participate in the running of the business? Depending on the law of your state, there may be a way to do this. It works like this. The general partner in the limited partnership is converted into a corporation. The limited partners then invest in the corporation in exchange for shares of corporate stock. One or more limited partners may then be hired by the corporation as employees to help run the business.
This is a unique strategy that is viable in some states, but not in others. Make sure to get competent legal advice from a business attorney in your area before implementing it. If it is viable in your state, it can be a great way to approach high risk business ventures.
Richard A. Chapo is with SanDiegoBusinessLawFirm.com - California incorporation services .