Limited Partnerships: Your Comprehensive Guide
By: Barry E. Haimo, Esq.
March 24, 2025
If you are trying to decide which entity you should use for your new business endeavor, there are numerous things to consider. One potential option to look at if you want something straightforward and easy to set up is a limited partnership.
An Introduction to Limited Partnerships
The below video will give you an overview of what limited partnerships are and how they work.
Read Transcript
Hi. This is Barry Haimo. Thanks for tuning in for another dose of Bite-sized Bits of Knowledge, where we give you meaningful information in a short amount of time. Today, we’re jumping into limited partnerships.
Limited partnerships have been around for a long time. They’ve been used for a lot of reasons, including estate planning, which of course LLCs have also started to become very useful as well.
To form a limited partnership, you do have to file something with the state, and it is usually much more expensive than the other alternatives we’ve spoken about. For a limited partnership, just the minimum of two partners, it’s usually a general partner and a limited partner. Raising capital is similar to corporations and LLCs in the sense that you can raise more capital by issuing new partnership interests.
You can also raise debt if that’s a preference. In terms of their longevity, they can remain alive in perpetuity unless the partnership agreement says otherwise. Again, you need a partnership agreement. Operationally, they’re very different. There are some requirements, unlike a corporation, but there’s a lot less requirements in corporation management. In terms of management, they’re very different from corporations and LLCs.
The way a limited partnership works is that you have a general partner and you have one or more limited partnership partners. The limited partners have no active role in the business. No active role in the business. They have a hat that says no active role.
The general partners have a hat on that is the active role. They’re the managers of the business. They’re in complete control of the business. Okay? You can be the same person with different hats, okay? But suffice to say that in a limited partnership the general partner is in complete control of the business.
It doesn’t matter if the general partner is a 0.1% owner, he or she or it is in control of the business. That’s why usually in a limited partnership the general partner is a company – is another entity serving as that general partner. Because guess what? The general partner, aside from the business liabilities, the general partner is completely liable for all of the business liabilities of the partnership as well. That’s why a separate entity is the general partner.
So you’ll have an LLC as a general partner and a bunch of maybe trusts or people as limited partners. And again, the business liabilities are one thing, the general partner is also subject to those liabilities. So management is very different in a limited partnership.
In terms of liability. I kind of just mentioned that general partners have unlimited liability. That’s why there’s an entity usually that encapsulates that liability from the people who are owners of that general partnership interest.
Limited partners have limited liability just like a shareholder of a corporation or a member of an LLC. Taxation-wise, they’re the same as a partnership. The partnership will file a 1065 reporting the gains and losses and the shareholders identities and their respective shares of the gains and losses, which of course flow through down to the partner’s personal tax returns via a form K one.
In terms of interest transferability, it’s really the same as a corporation. LLC interest can be transferred, the default rules will kick in, and under 620 you can find out those rules. If you so desire. I’d recommend you do a partnership agreement that outlines what you want the rules to say, because again, you can modify almost all of them. Allocations of cash is different from a corporation.
It’s similar to an LLC electing to be a partnership. And it’s similar to a general partnership in the sense that you can allocate the available cash to the partners pro rata or any way that you agree, as long as they have substantial economic effect, meaning that the agreement and reality are the same.
That’s great for investors. Investors like that because they can get their money back first, plus a preferred return with distribution preferences and so forth. You just can’t do that in a company, sorry.
A corporation, whether C or S, in terms of dissolving, it’s just as complex as a corporation. LLC has a lot of rules, got to do it right. You can get in trouble in terms of who is it best suited for. I mean, I would say it’s an expensive proposition to do them. I don’t think that you need to do them. You can do them the same exact structure. We can mirror it or model it in an LLC and you can do it a lot cheaper with an LLC for tax purposes. They have historically been used in estate planning to take advantage of discounting. That’s usually for estate tax purposes. And so that’s a tried and true method, but LLCs again can be structured the exact same way.
Now, I want to mention one more thing, though. There’s a lot of different kinds of limited partnerships. There’s limited partnerships I just mentioned, which have the general partner limited partner structure. There’s also limited liability partnerships, which have a different structure. That’s where you basically have a general partnership of limited partners.
You’ll see a lot of CPA firms and law firms that have LLPs. Think of that as like a bunch of incorporated entities being partners in a company. And there’s also triple LP, which just gets crazy. There’s a lot of different ways to do this. You do see them a lot, they are relevant, but I think that for most businesses there’s better alternatives. So I hope you found this helpful.
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Now that you have a basic understanding of limited partnerships, let’s go a bit more in depth on some of the benefits.
Why Should You Form a Limited Partnership?
There are a number of advantages to forming a limited partnership.
Setting Up a Limited Partnership Is Easy to Do
Forming a limited partnership is just as easy as forming a corporation or an LLC (it’s just more expensive). You should may want to create and file a trade name with the state of Florida and protect it federally and statewide; you should create and sign a partnership agreement, and obtain an employer identification number (sometimes referred to as a tax identification number).
Depending on the nature of the limited partnership, you may have to apply for other licenses or permits, but your basic limited partnership just needs to fill out a few forms to be recognized by our state.
Adding More Limited Partners Doesn’t Affect Who Makes Decisions
If you want to be able to add on partners easily, but still maintain control, a limited partnership may be the route for you. Like nonvoting LLC interests or nonvoting shares of stock in a corporation, limited partners in a limited partnership are not personally liable for the business’s losses and debts. They are only liable for what they invested in the limited partnership. Additionally, limited partners do not have a say in the limited partnership’s decision-making process. This equates to truly being a passive investment.
This often means that the business is run more smoothly, because decisions are more centralized like a corporation so they can be made quicker. However, because there are more partners, those decisions also tend to be implemented and carried out faster. It’s a win-win.
If a limited partner decides to leave the limited partnership, that can be done easily too. The limited partnership will be affected, but not to the point where it will be dissolved. These partners can also be easily replaced.
Limited Partners Hold Limited Liability
General partners (who run a limited partnership) can easily present the limited partnership to potential limited partners as a great investment opportunity that does not require too much work.
If you want to invest in a company, but do not want to be held personally liable for the shortcomings or debts, you can invest as a limited partner and watch the benefits flow in without day-to-day work.
Income Tax Benefits for Limited Partners
Partners in a limited partnership are all taxed on their personal income tax returns, and the profits and losses flow through the business straight to the partners. This means that limited partners are still able to reap the benefits of the limited partnership’s profits, but are not active participants in the management of the limited partnership.
Estate and Gift Tax Benefits to Limited Partners
If structured properly, partners in a limited partnership also enjoy discounts for lack of marketability and their minority interest; after all, if they cannot sell the interest and they do not control it, the value of their shares should appropriately be discounted.
If you decide to form a limited partnership, what parties make up that partnership?
Who Are the Parties in a Limited Partnership?
There are two different types of partner roles in limited partnerships: a general partner and a limited partner.
It is common for business entities to serve as both a general and limited partner. And individual investors typically stick to the limited partner role. Let’s dive deeper into the responsibilities, duties, benefits, and drawbacks of each of these roles.
The Role of a General Partner
Florida requires general partners to be named when the limited partnership begins. These are partners that take an active role in the management of the company – in fact, they run all aspects of the business.
Due to their active role, they also must take on more liability than the limited partners. Specifically, they are 100 percent liable for the debts of the partnership. This is why business entities are more commonly general partners; they limit the liability exposure of the shareholders’ and officers of the general partner.
Examples of limited partnerships include:
- Royal Caribbean
- Wynn Resorts
Other examples of general partners in a limited partnership include:
- Co-owners of the business or larger investors who want to have a say in the limited partnership’s management decisions.
Usually limited partnerships have one or two general partners. This means that even though they run the entire company, general partners typically only make up a tiny percentage of the total ownership of a business – sometimes as low as 0.1 or 1 percent.
The Role of a Limited Partner
Which brings us to the duties and responsibilities of the limited partners (sometimes called “silent partners”). These are the remaining partners in the LP, and they have a lot more flexibility as to how much capital they would like to contribute to the LP. They do not participate at all in the business. They are passively involved, and in fact they are not permitted to participate or they will be characterized as general partners.
Limited partners all earn some sort of passive income through the limited partnership. But they do not receive dividends on behalf of the LP, and will not be personally liable for the debts of the LP. Think shareholders, but for a partnership.
Examples of a limited partner may include:
- A family member or friend who wants to invest, but not participate in the everyday operations of the limited partnership.
If limited partners want to dissolve their role in the partnership, it is possible for that partner to be bought out by another party. However, if general partners want to dissolve their active status in the limited partnership, they may have a harder time doing so, and may have to go to court to resolve the issue.
What business documents will you need when forming your limited partnership?
What Are the Governing Documents for a Limited Partnership?
Even though a limited partnership can be formed with a handshake, you want to have the agreements of your new business venture on paper. This way each party will have a clear picture of how the limited partnership will operate — both through regular business and when any abnormal circumstances or disputes arise.
It helps to think through some of these more unusual circumstances so you have a set process for how to handle them. The best time to do this is in the beginning when everyone is excited.
Why? Because it’s much harder after problems have already arisen, causing tension between the partners.
Actual governing documents for a limited partnership are not required by Florida law. That being said, there are a few other documents that must be submitted for the business to begin operations in the state.
What Documents Need to Be Submitted to the State?
For a limited partnership to be formed in Florida, partners must register the partnership with the Department of State Division of Corporations. Specific licenses and permits may also be required before the partnership begins operations.
Perhaps the most important document for forming a limited partnership, however, is the limited partnership agreement. This is the document that spells out the terms of the partnership and will govern it throughout its duration.
Even though a limited partnership agreement is not required in Florida, you should seriously consider executing it when forming a limited partnership.
Why Write a Limited Partnership Agreement?
Without proper governing documents, Florida’s laws will dictate how the limited partnership is established and managed. Creating a limited partnership agreement gives you more control.
How so?
Because the terms of the limited partnership agreement override Florida law. This is one of the main reasons that a thorough, well thought-out partnership agreement is so important.
If an issue is disputed, but not covered in the agreement, the parties will have no choice but to follow Florida law to reach a resolution. This is particularly important, because it increases the likelihood that you could end up taking small disputes to court.
Why is this bad? Because litigation is very time-consuming and expensive. Having to go through it can’t help but add extra headaches, time, and money to these issues.
However, if a plan is laid out in the original limited partnership agreement, you can resolve these kinds of issues on your own.
What Should Be In the Limited Partnership Agreement?
Limited partnership agreements are drawn up to make sure each partner is aware of the partnership’s operations, management, transfers, allocations of profits and losses, distributions, and how to address disputes. It is not necessary to include every situation or conflict that could come up during the course of the limited partnership. Again, though, if it is not in the limited partnership agreement, Florida law will apply its own methodology to solve the dispute.
Before you draft the proper documents for your limited partnership, consult with a business planning attorney and go over Florida’s current laws for partnerships.
At the most basic level, your limited partnership agreement should include the following:
- What each partner will contribute to the limited partnership
- How profits and losses are distributed to the partners
- Distribution of ownership interest among and between partners
- Management structure
- The responsibilities of each partner
- How decisions are made
- How disputes are resolved
- When new partners can join/how they are admitted
- Exit rights and responsibilities of each partner
- How death and disability are handled
- How termination of employment is handled
- How remaining partners will handle the exit of one partner
Is a limited partnership right for you? Maybe. Maybe not. Choosing a type of structure for your business is one of the most important decisions you’re going to make in setting it up, though, so we strongly recommend consulting with a Florida business planning attorney before you take the leap.
Want us to walk you through the available options and discuss which ones seem best for your specific situation? Reach out for a consultation.
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Originally published 12/16/2021. Updated 03/24/2025.
Author:
Barry E. Haimo, Esq.
Haimo Law
Strategic Planning With Purpose®
Email: barry@haimolaw.com
YouTube: http://www.youtube.com/user/haimolawtv
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