What’s Behind a Limited Partnership Agreement?
Signing a limited partnership agreement might be a great idea for incorporating the skills and expertise of several individuals and creating a business team. If you haven’t come across this legal document, keep on reading, and discover the true potential of a limited partnership agreement.
What Is a Limited Partnership Agreement?
A limited partnership agreement is a contract between two or more partners. It usually consists of:
- General partners
- Limited partners
A general partner owns, runs, and oversees the business, whereas a limited partner does not have a managerial role. The general partner has unlimited liability for the company’s debts, while the limited partner only invests money in the business and has limited liability for the debts, usually up to the investment amount.
A limited partnership agreement contains the following information:
- The names and addresses of the partners
- The purpose of the partnership
- Definition of voting rights in business decisions
- Decision-making procedures—Unanimous vote, majority vote, or majority vote based on percent ownership
- The percentual ownership of every partner
- Management roles
- Accounting and auditing protocols
- Share-trade rules
- The termination policy
- Signatures of all parties
Are There Different Partnerships?
There are three forms of partnerships:
- General partnership
- Joint venture
- Limited partnership
Since we already explained limited partnerships, let’s take a look at the other two.
A general partnership implies that all the partners share the profits, management responsibilities, and liability for debts equally. If any of the partners want to share the profits or losses unequally, they should clearly state this in the agreement.
A joint venture is similar to a general partnership, but it is valid until the end of a predetermined period or the completion of a project. All partners have equal rights to manage the business, share profits and debts. A partner also has the responsibility to act in the best possible interest of other parties.
The Difference Between a Limited Partnership and Limited Liability Partnership
These two partnerships are often confused. The table below summarizes the key differences.
|Differences||Limited Partnership||Limited Liability Partnership|
|Limitation of Liability||
What Are the Pros and Cons of a Limited Partnership Agreement?
Running a limited partnership has several advantages and disadvantages. The pros are:
- Capital amount—More than one individual helps develop the business and contributes to the capital, which can make the amount substantial
- Limited liability—Limited partners are not personally liable for debts, and they are not at risk of using their assets to repay them
- Shared responsibility of work—Partners share the workload according to their skills. Except for the workload, the decision-making process involves several partners and reduces the responsibility of any individual
- No turnover issues—The partnership will be active even if a limited partner leaves or another one joins. There is no need to terminate the partnership
The cons of a limited partnership agreement are:
- Breach of agreement—Partners may not agree on all the decisions. This can lead to disputes and breaches, putting the business at risk
- General partners bear the entire debt risk—General partners are liable for the debts, which puts them at a disadvantage compared to the limited partners
- Limited partners do not have a say in the decision-making process—Limited partners do not participate in making decisions, which could lead to inconsistencies and disputes
- Partnership duration—If a general partner dies, the business may not continue to exist unless other partners make a new agreement
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