Limited Partnerships are entities consisting of at least one general partner and at least one limited partner. The general partners manage the business’ day to day operations and are liable for the debts and obligations of the partnership. The limited partners (often called silent partners) do not participate in the partnership's management. Their risk is limited to their investment in the partnership and their identity may remain anonymous making the Limited Partnership ideal for attracting passive investment. It is important that the limited partners take care not to participate in the management of the partnership in any way. Otherwise, they risk losing their limited partner status. In California, professionals such as attorneys, accountants, architects and physicians are not allowed to form a Limited Partnership. San Diego partnership attorney Don Oder understands the nuances associated with drafting partnership agreements and works closely with partners to ensure their goals are met.
While Corporations and Limited Liability Companies (LLCs) also offer liability protection, Limited Partnerships retain the maximum flexibility of General Partnerships and are relatively simpler to govern. Partners in the Limited Partnership may be individuals, Corporations, LLCs, trusts or other partnerships. Because of the general partner's exposure to unlimited personal liability, Limited Partnerships are often set up so that the general partners are Corporations or LLCs.
Unlike a General Partnership, setting up a Limited Partnership in California requires the filing of a Certificate of Limited Partnership with the California Secretary of State (Certificate of Limited Partnership (Secretary of State Form LP-1)). In addition, a written or oral limited partnership agreement setting forth the details of both the limited and general partners' rights and obligations is required. However, a written agreement is highly recommended. (See "Why Oral Partnerships Are a Bad Idea"). The governing terms of a Limited Partnerships agreement can be very complex. A well-drafted written agreement by a partnership lawyer in San Diego will define the roles of the general and limited partners and ensure that rules are in place to deal with important contingencies such as the death or bankruptcy of one of the partners.Taxation
Limited Partnerships are subject to pass through taxation. Unlike the general corporation which is taxed on the corporate level and then again on the income distributed to shareholders (double taxation), the partnership itself is not taxed separately. Rather, the partners (both limited and general) are taxed on an individual level based on their share of profits or losses. Because the limited partners' investment is passive by nature, their losses are subject to “passive activity loss” and “at-risk” tax rules. These and other tax rules place limits on deductions for losses from investments that are passive and/or are not considered to be at-risk.Securities Issues
Because the limited partners are passive investors, California Limited Partnerships by their nature are securities. Securities must be registered with the Securities and Exchange Commission (SEC) and the California Commissioner of Corporations. However, there are numerous exemptions to the registration requirement available including exemptions for the sale of securities to accredited investors (sophisticated investors with high incomes and net worth). Because registering securities can be a daunting task, it is advantageous for Limited Partnerships to target accredited investors. It's helpful to consult a San Diego partnership attorney to discuss whether your partnership will qualify for one of the many exemptions.
While limited partners generally have no fiduciary duties, they do have some obligations. Limited partners cannot hold interests adverse to the partnership, cannot compete with the partnership, cannot engage in illegal or grossly negligent conduct and must exercise good faith and fair dealing in all matters relating to the partnership.
For a free consultation, contact San Diego partnership lawyer Donald R. Oder at (888) 900-9002.