a special type of partnership which is very common when people need funding for
a business, or when they are putting together an investment in a real estate development.
A limited partnership requires a written agreement between the business management,
who is (are) general partner or partners, and all of the limited partners. Each
limited partner makes an investment of funds into the partnership and is supposed
to receive a pre-stated share of the profit, which is ordinarily greater than that
of each of the general partners up to a point (such as return of the investment),
and, thereafter, the limited partners will receive a lesser share than the general
partner(s). The limited partners also will receive the tax benefit of a "passed
through" loss (a personal income tax deduction for part of the loss) during the
development stages of the partnership when the expenses exceed any receipts. Quite
often there is also a provision for eventual buy-out of the limited partners by
the general partner(s). The limited partners may not participate in the management
decisions of the partnership or they will lose their limited partnership status.
They do have the power to vote to remove the general partner(s), although usually
the partnership agreement is structured so that such removal is virtually impossible
unless the general partner in question has committed fraud. Since the limited investors
have no control of the conduct over the partnership, they should make sure they
have considerable knowledge about the reputation and record of the general partner(s)
and the type of business. In fact, state laws require that there be some pre-existing
acquaintanceship between the general and the limited partners or a detailed prospectus
provided by the general partner(s) meeting very stringent and specific federal requirements
of disclosure. The maximum number of limited partners is set by state law to prevent
using interests in the limited partnership as if they were shares of stock in a
corporation. In addition to priority in profit, tax deductions, and potential share
in the success of the enterprise, the limited partner is "limited" in potential
loss, since all he/she can lose is his/her investment, and the general partners
alone are subject to claims, debts in bankruptcy and lawsuits against the partnership.
Limited partnerships must file their name and names and addresses of general partners
with the Secretary of State or other designated officer in the state in which the
partnership is created so the public can find out who the responsible parties are.
Like a corporation, a limited partnership may not have a name which is too similar
to another limited partnership or corporation.
See also corporation general partner limited liability partner partnership
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