To understand what a limited partnership is, it is helpful to know what a partnership is in general.
A partnership is an association of two or more persons to carry on a business for profit as co-owners. A partnership is formed when the parties to a business have the ability to share in the profits and if they have a right to control the business. Those parties will then be said to be partners.
There are three different types of partnerships: general partnerships, limited liability partnerships (i.e., LLPs), and limited partnerships. The type of partnership that was formed will determine the amount of liability that an individual partner may face as part of the partnership.
What Is an LP?
The purpose of a limited partnership is to protect each partner from individual liability for debts, losses, and violations related to the partnership as a whole. Limited partnerships differ from other partnerships in that all partners have limited liability. Their investment contribution to the business determines partners’ limited liability. One or two general partners also run a limited partnership.
Conversely, in a general partnership, every partner shares in the losses incurred by the partnership. Partners who play only a minor role in the business or contribute fewer funds than the other general partners can be at a disadvantage.
For a limited partnership to be considered properly formed, at least one general partner is required. Managing the limited partnership and its day-to-day operations will be the responsibility of the general partner.
Limited partners have limited powers over the partnership and are only liable to the extent of their investment in the partnership. As a result, they are primarily responsible for limited partnership investment duties.
What Are the Requirements for an LP?
In Alabama, the requirements to form an LP are the following:
- File a Domestic Limited Partnership Certificate: An LP must file a Domestic Limited Partnership Certificate with the probate judge in the county they want to do business, along with the current filing fee, in order to become a recognized legal entity.
- Check the Name of Your Limited Partnership: You must also name the LP and be sure to check that the name of the LP is not used and is unique from other business entities of trademarks in Alabama. The name also must include “limited” or “LP.”
- No Written Agreement Required: You do not need any written agreements other than the Certificate of Limited Partnership to form a limited partnership.
- Partner Requirement: Alabama law does not limit the number but does require that limited partnerships have at least one general partner and at least one limited partner.
What Paperwork Do I Need to Form an LP?
An Alabama Limited Partnership must file a Domestic Limited Partnership Certificate, along with a filing fee, with the county probate judge.
Certificates must state the following:
- Name of the LP
- Address of office of LP
- Address of the agents of LP
- Name and Address of each partner of the LP
What Benefits Does Alabama Give to an LP?
The benefits of having a limited partnership in Alabama are numerous.
These benefits are:
- Limited Liability: Limited partners who form an LP and contribute money only face limited liability. This means that if the business goes bankrupt, the limited partners would only be liable for the amount of money they invested or contributed to the business and nothing more.
- Tax Benefits: The profits and losses in an LP flow through the business to the partners, all of whom are taxed on their personal income tax returns and get to share the profits and losses.
- Less paperwork: An LP has less paperwork than the formation of a corporation.
- No Annual Meetings: Alabama law does not require a limited partnership to have annual meetings, file reports with the Alabama Corporation Commission, Alabama Secretary of State, or other state agencies, or that the partnership pay any annual fees.
What Disadvantages Does Alabama Give to an LP?
Although there are plenty of benefits and advantages, there are some disadvantages to limited partnerships in Alabama.
Limited partnerships, for instance, have less control over the business than general partners.
The general partners might see becoming active in the LP as a risk. A limited partner’s income is not considered for tax purposes, unlike that of a general partner, so they usually have to pay self-employment tax.
Is it Possible to Withdraw From a Limited Partnership?
Unlike a general partnership, a partner in a limited partnership may withdraw from the business without subjecting it to an automatic dissolution. This is just one of the key differences between a limited partnership and a general partnership.
The limited partner who withdraws from a limited partnership must notify the partnership and file the necessary paperwork with the State (i.e., withdrawal documents). In addition, the remaining partners must buy out the withdrawing partner.
When a partner withdraws from a general partnership, it usually results in its dissolution (termination). A general partnership can also dissolve when one or more of its partners dies or becomes incapacitated.
What If I Have a Dispute That Involves a Limited Partnership?
The amount of liability that can be attributed to each partner is one of the primary factors that differentiate all three partnerships. If the partnership suffers financial losses, this will help determine which partner should be held liable.
Limited partners are normally only liable for their investments in the limited partnership. In contrast, if a limited partner acts outside of their duties as a limited partner, they will likely be held personally liable for any injuries or losses.
The limited partner could be held personally liable if they represent themselves to a third party as a general partner and start making management decisions.
On the other hand, if the limited partner was acting within the scope of their duties, which are usually set forth by the terms of an entity’s partnership agreement, it is more likely that the overall limited partnership will be responsible for any injuries or losses that result.
Several partners in the partnership may be jointly liable for the partnership or for paying damages awarded to a plaintiff. An individual’s liability agreement, as well as the facts surrounding the case, will determine the outcome of the case.
How Do You Find the Right Lawyer?
Limited partnerships are subject to a complex set of legal requirements and protections. There is no one-size-fits-all when it comes to limited partnerships. Limited Partnership laws can vary from state to state. It’s in your best interests to hire a local Alabama corporate lawyer if you need help with the limited partnership laws in your area. An attorney can assist you with tasks such as filing, creating documents, and negotiating partnership agreements.
Any business would benefit from an experienced Alabama corporate attorney’s services, as seen from the examples above. You should consult a lawyer before starting a business in Alabama, especially a partnership.
If you have any legal issues, an experienced and local Alabama corporate lawyer can assist in ensuring that you are complying with all necessary laws and regulations.
Use LegalMatch to find the right Alabama business lawyer for your partnership needs today.
