Limited Partnership: Legal Attributes/Formalities

 A limited partnership (“LP”) is governed by the Uniform Limited Partnership Act of 2008 under the California Corporations Code, Title 2, Chapter 4.5.  An LP is comprised of one or more “general” partners who manage the business and are personally liable for partnership debts, and one or more “limited” partners who contribute capital and share in the profits, but who normally take no part in running or managing the business and who incur no liability with respect to partnership obligations or liability beyond their capital contributions.

The general partner of an LP is subject to the same liabilities as the partners of a general partnership, i.e., joint and several liability for all debts and obligations of the partnership. The limited partner is primarily a passive investor, and normally is not active in management and control of the business on a daily basis. However, even though limited partners are considered passive investors, they have the right to information, reports and accountings from the partnership, to inspect partnership records, and to attend partnership meetings. It should be noted that although a limited partner is normally not labile for partnership debts, participation in management creates a risk of personal liability.

A LP must file a certificate of limited partnership form LP-1 with the Secretary of State in order to obtain the status as an LP. The form must be signed and acknowledged by the general partners, however, the names of the limited partners and the amounts of their investments need not be disclosed. Lastly, although no partnership agreement is required, it is recommended that a partnership agreement be drafted to include all pertinent terms and arrangements.

LP: Formation Start Up Cost

The initial CA state-filing fee for the LP-1 form lists at $70. For service of process, an agent must be designated that is either an individual who resides in California or a California registered corporate agent. Please use the following Comparison Chart for side by side comparison.

LP: Tax Attributes

LPs can elect the tax advantages of a partnership––i.e., pass-through taxation. Because of this pass-through taxation, the entity itself is exempt from federal taxation but still subject to one state level tax–the annual $800 franchise tax fee. Once the partnership expenses and state franchise tax have been deducted, the remaining balance of profit is allocated to the partners. As with all partnerships, the LP must declare its operating losses and profits to the IRS and then each partner must file their respective individual taxes (similar to an S-corp yet more complicated than a single-member LLC filing). It should be noted that in addition to state and federal income taxation, typically only the general partners are subject to self-employment tax on all income (limited partners avoid self-employment tax by qualifying the income as passive income). Please use the following Entity Selection Tax Cheat Sheet to predict your tax liability.

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