Limited Partnerships
Best Practice Summary

A limited partnership is a form of partnership designed to distinguish between active participants in the business (the general partners) and passive investors (the limited partners). A limited partnership is governed by the state laws of the state in which it is organized. Each limited partnership must have at least one limited partner and at least one general partner. Individuals, partnerships, corporations, limited liability companies or any other business entity may be either general or limited partners of a limited partnership. Please note, however, that in some states a corporation may not be a general partner unless its charter so provides.

Quick Reference:
LeapLaw's 50 state pages summarize limited partnership formation requirements in each state.

Advantages and Disadvantages

Advantages
Like stockholders of a corporation, limited partners have limited liability for the debts and obligations of the limited partnership. A limited partner's liability is limited to the amount of its investment, provided that it takes no active role in the management of the limited partnership. In addition to limited liability for limited partners, benefits of a limited partnership structure are:

• the ability to raise capital from passive investors
  
• "flow-through" tax treatment (no tax at the partnership level; gains and losses are allocated to the partners each year for tax purposes)

Disadvantages
General partners, having full control of the business, are jointly and severally liable for the debts/obligations of the partnership.

• A limited partnership has no "continuity of life" and will dissolve unless there continues to be at least one general partner and at least one limited partner.

More information on selection of an appropriate business entity can be found on LeapLaw's Business Structure Comparison Chart.

Formation Procedure

Business Name

The limited partnership name must not be deceptively similar to the name of another business in the same state and may be rejected by the secretary of state if it conflicts with an existing name. In addition, a limited partnership name generally must contain the words "Limited Partnership", "L.P." or "LP". Specific state laws should be checked.

Name availability may be determined by calling the secretary of state directly, checking online using LeapLaw's Corporate Connection or via your preferred service company. When the name will be registered in several jurisdictions, using a service company is likely the most time-efficient solution.

If the name is available, reserving it in the state it will be organized as well as any foreign states it may be registered may be wise if the filing will be made at some later date. It is also important to note that the reservation process in some states can take longer than the time it may take to file the formation or registration documents.

Note: A state's acceptance of a business name does not mean the name is an available trademark or service mark. Other searches may be required if the company plans to determine any potential trademark or service mark issues. It is good practice to verify with the responsible attorney if the company will require a trademark search and/or domain name registration prior to reserving the name in any states.

A secretary of state may deem the proposed name to be unavailable due to a name conflict with a currently registered business name. Depending upon the state, certain steps may be taken to cure the name conflict. For more information regarding name conflicts, see LeapLaw's Name Reservation Best Practice Summary.

Preliminary Trademark Searches
Trademark searches may be performed to assure that a proposed business name is not deceptively similar to an existing mark. Preliminary searches for registered trademarks may be performed for free on the LeapLaw's Intellectual Property Connection.

Note: A trademark or service mark does not have to be registered to be protected. Simply using the mark in commerce gives rise to a claim.

The popular "full" trademark search provides a comprehensive search of a proposed trademark against current federal, state and common law trademarks and domain names. The report provides extensive information regarding trademark availability. For more information on trademarks and service marks, see LeapLaw's Trademark Best Practice Summary.

Domain Names
Domain names are registered web site addresses or "URLs". When registering domain names it is best practice to reserve all possible applicable name indicators if the name will serve as the main business name. Domain names may be checked for availability and obtained at Network Solutions. Network Solutions WhoIs can assist in determining current owners of a domain name. Checking the availability of the domain name simultaneous with checking the corporate name availability and trade name status is good practice if the company name is to be a trade name for the business.

Limited Partnership Agreement

Formation of a limited partnership requires a written limited partnership agreement containing all the terms and conditions of the limited partnership, such as:

• Management, duties and responsibilities of general partners.
• Procedures for admission and withdrawal of limited or general partners.
• A specified dissolution date or terms of dissolution, if any.
• Partners' contribution obligations, rights and powers.
• Rules for allocation of the partnership's gains and losses.
• Rules for distribution of partnership assets.
• Fiscal year end of the partnership.
• Any other matters specific to the partnership.

Amendments to the Limited Partnership Agreement
Amendments to the limited partnership agreement are made according to the provisions set forth in the limited partnership agreement. Since state laws provide that management and control of a limited partnership must rest exclusively with its general partners, limited partner consents are rarely necessary except for the admission of new partners and changes affecting the rights and obligations of the partners.

Specific state laws may place limitations on the arrangements that may be included in the partnership agreement. In addition, the provisions of the agreement governing partners' contributions, allocation of gains and losses the distribution of assets must comply with applicable tax laws and regulations for the partnership to maintain "flow-through" tax treatment.

Certificate of Limited Partnership

A limited partnership is formed when a certificate of limited partnership is filed with the secretary of state of the state of formation, containing the information required by that state. Generally a certificate of limited partnership will contain:

• The name of the limited partnership.
• The general character of the business.
• Name and address of resident agent.
• Name and address of each general partner.
• The date of dissolution of the partnership, if any.
• In some states, a list of the limited partners together with their contributions.
  

NOTE: Very few states now require originals to be filed. However, where that is the case, duplicates may be required.

Amendments to the Limited Partnership Certificate
The certificate must be amended whenever information contained on it become inaccurate (most typically upon the withdrawal or appointment of a new general partner).

Foreign Qualification
If a limited partnership transacts business in a state other than its state of organization, it may be required to file an application to do business as a foreign limited partnership with the secretary of state of that state. Failure to file foreign registrations may subject the limited partnership to penalties and fines. Local permit and licensing requirements, if any, must also be met. See LeapLaw's Foreign Qualification Best Practice Summary for more detail on foreign qualification procedures.

Forms

Forms for certificates of limited partnership, amendments and foreign registration certificates may or may not be pre-printed by the secretary of state. Pre-printed forms may be available at LeapLaw's 50 state pages. If the state does not use pre-printed forms, the filings must be drafted by following applicable state laws.

Need assistance? Virtual Paralegal Services provides paralegal services including preparation and filing services in all 50 states. For more information contact us at [email protected].

Federal Identification Number

The Internal Revenue Service issues federal identification numbers (FIN) (a/k/a an Employer Identification Number (EIN)) to new corporations. To apply for an FIN, an IRS Form SS-4 (pdf) must be filed with the IRS. Since January 2002, Form 2848, Power of Attorney is no longer necessary for third-party designees. Completing the the new "Third Party Designee" section on the Form SS-4 will suffice. Tax identification numbers may be obtained:

• Online in just a few minutes.
  
  
• Via telephone to a third party by calling (866) 816-2065 Monday through Friday, 7:30 a.m. to 5:30 p.m. so long as the Third Party Designee section has been completed.
  
  
• Via fax to certain IRS Service Center. The number will be supplied within a few days via telephone.
  
  
• Via mailing Form SS-4 to the designated IRS Service Center.

LeapLaw's Federal Identification Number Checklist provides a list of information for completing the Form SS-4. LeapLaw's Federal Identification Number Best Practice Summary provides more information regarding federal identification numbers.

Annual Reports; Franchise Tax

Applicable state law should be checked to determine whether an annual report or franchise tax filing is required. 50 State Periodic Reports Chart provides a quick reference to laws, as well as limited partnership name requirements, initial form requirements and the secretary of state link.

Cessation of Business

Consolidation or Merger
Limited Partnerships may generally merge with or into any other business entity. Provisions governing such mergers will be contained in the state laws of the state of formation and the state of incorporation or formation of the other entities involved in the merger.

For additional information regarding mergers, see LeapLaw's Mergers Best Practice Summary.

Dissolution
A limited partnership will generally dissolve in one of four circumstances:

• The partners agree to dissolve.
• There is no longer at least one general and at least one limited partner.
• Any general partner withdraws, and the remaining do not agree to continue the partnership.
• The dissolution date specified in the limited partnership agreement has been reached.
  

Upon dissolution:

• The property and assets of the limited partnership are distributed among partners according to the rules set out in the limited partnership agreement.
• A certificate of cancellation is filed with the secretary of state of the state of organization.
• Certificates of withdrawal are filed in all other states in which the partnership was qualified to do business.
• Licenses and permits held under the limited partnership name, if any, may be terminated or sold.

Recordkeeping

State law generally requires that records of a limited partnership be maintained at the principal address of the business.

Since limited partnerships are managed and controlled by the general partners, actions of a limited partnership are taken by consent of general partners according to the rules specified in the limited partnership agreement. Such consents are usually in written form, although it is perfectly acceptable to record minutes of a general partners' meeting. Originals of written consents and meeting minutes should be maintained chronologically in a partnership records book.

Other documents contained in the records book may include:

• An original copy of the limited partnership, agreement together with any amendments.
• Certificate of limited partnership as filed with the Secretary of State together with any amendments.
• Consents or actions of general partners (or minutes of general partner meetings).
• Consents or actions of limited partners.
• Partner interest and contributions ledger (if not included in the limited partnership agreement).
• Foreign qualification certificates.
• Federal identification number filing (IRS form SS-4), if any.

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