Oftentimes, two or more entrepreneurs will share a similar idea, and if you consider that two heads are always better than one, combining forces in order to get the best results is only logical.
Usually, people opt for a limited partnership, which has slowly become one of the most popular business structures for any entrepreneur working towards a common goal.
We’ll go over what makes a limited partnership tick and what you can do to make yours function as optimally as possible, as well as give you some much-needed tips on how to register your very first one.
Forming a limited partnership is much more complex than it seems at first, and you’ll need some guidance to make sure you’re on the right track.
Keep reading to learn all the things that could help your journey to a limited partnership be much easier to handle.
The basics
Compared to an informal partnership, a limited partnership comes with a number of different advantages, including the fact that it’s viewed as a formal legal entity, allowing you to have liability protection, similar to how corporations have it.
Any individual or business can register a partnership, with one of the parties always taking the limited or general partner role, whereas the other takes what’s remaining.
This applies to all business structures in the US, ranging from startups to existing businesses, meaning that an LP is practically only a few steps away for any ambitious entrepreneur looking to make it in today’s market.
The uniqueness of this business classification comes from the fact that it’s split between a limited and a general partner, both of which have their own roles in running the business, each with their own responsibilities and authority over how the business conducts its operations.
What are the differences?
Even though they sound quite similar, a general and a limited partner are worlds apart, and understanding the differences between the two types of parties involved in a limited partnership is key to its success.
A limited partner is generally considered to be a passive investor in the business dynamic, contributing to the company’s finances without actually doing much in regard to the daily operations the business conducts.
If you look at it this way, limited partners are only responsible for making sure the company stays afloat, and when business is flourishing, they reap the rewards of their well-timed investment in a certain market.
On the other hand, a general partner has a much more hands-on approach to the partnership itself, and while they can definitely contribute to the business’s capital, their main concern is that everything is running as smoothly as possible.
From creating strategies to leading the workforce in the right direction, a general partner’s role is integral for any small business out there looking to make it big.
The advantages
At this point, many wonder why one would even register as a partnership, seeing as having more people involved also means your own contributions won’t be as impactful as they would be if you were the sole founder.
However, a lot of the popularity comes from the safety a limited partnership has to offer, as limited partners have their assets protected at all times, meaning that becoming part of an LP is a great way to protect your personal assets from the test of time if you’re already a passive investor.
On top of this, LPs are usually popular among investors looking to turn a quick buck on a promising idea, and due to the safety they offer, they’re an incredible option for anyone in need of a reliable and easy way to generate revenue and an increase in their income.
Finally, registering one is as simple as it gets, and you may find that even though multiple parties are involved, the paperwork is extremely simple, and even record keeping is much less demanding than it would be for a corporation of the same size.
It’s not all sugarcoated
Despite all of this, registering a business with anyone else certainly means that you could eventually be facing a dispute over a number of things, although the most common one is over the poor decisions one of the involved parties can make.
To help circumvent this, a limited partnership agreement often includes a clause allowing for the assets of one of the parties to be seized if their decision lead to the LP being sued or going into debt.
There’s also the fact that being a limited partner doesn’t exactly make you part of the company, and while you’re definitely respected as an investor, your opinions will do little in terms of making changes in the company.
In fact, you may only be consulted on the large decisions that could affect the overall operations of the business, whereas the rest may just slip past you with ease.