A partnership is the association of two or more individuals who carry on as co-owners of a business for profit. A partnership is considered to be formed when the parties to the business have the ability to share in the profits as well as have a right to control the business.
The parties to the business will often be called partners. There are three different categories of partnerships, including:
- General partnerships;
- Limited liability partnerships; and
- Limited partnerships.
The type of partnership that the individuals form will determine the amount of liability that an individual partner may face as part of that partnership.
What is a Limited Partnership?
A Limited Partnership, also referred to as an LP, is a business structure that provides limited liability to the partners, or members, as well as the structural and tax flexibilities of a partnership. The limited liability aspect of the limited partnership protects the assets of the limited partners from any legal claims, debts, or losses to the LP.
In addition, similar to partnerships, an LP is free of many of the organizational requirements of corporations and corporate taxes. With general partnerships, in contrast, each partner is held individually and jointly responsible for the losses that are incurred by the partnership.
This may, in certain situations, put the partners at a disadvantage, especially when they only play a minor role in the partnership or if they have contributed a lesser amount of funds to the business than the other general partners. Although an LP is called a limited partnership, each limited partnership is required to have at least one general partner to be considered properly formed.
The general partner is responsible for making management decisions for the LP and its daily operations. Limited partners only have limited powers over a partnership and may only be held responsible to the extent of their investment in the limited partnership.
Because of this, limited partners are typically only mainly responsible for the investment duties related to the partnership.
What are the Requirements for a Limited Partnership in Kentucky?
Limited partnerships can only be formed under state laws. Because of this, the requirements and protections for LPs may vary widely by state.
Although there is a large amount of flexibility when creating and structuring an LP in the State of Kentucky, there are also a few mandatory requirements, including:
- Choosing a name for the LP: This name must be different from all other business names on record at the Kentucky State Corporation Commission and must include the words:
- limited;
- Ltd;
- Limited Partnership;
- LP; or
- L.P.;
- Choosing a registered agent: Kentucky requires that every business entity have a registered agent to make sure that any important information or any legal documents will make it to the LP. A registered agent may be any Kentucky resident or Kentucky corporation except the LP itself;
- Certificate of Limited Partnership: The Kentucky Secretary of State provides a PDF fillable Certificate of Limited Partnership. This document requires:
- the name of the LP;
- the principal office of the LP;
- the name of the registered agent;
- the principal office address of the LP; and
- the business address of the registered agent, which must be in Kentucky;
- Copy: The Kentucky Secretary of State requires one complete copy of the Certificate of Limited Partnership to be delivered with the original;
- Annual report: Kentucky requires that every Limited Partnership file a yearly annual report. The annual report along with a filing fee can be filed with the Secretary of State online, by mail, or in person; and
- Partnership agreement optional: Kentucky does not require a partnership agreement but such an agreement is a good idea to resolve issues such as:
- partner contributions;
- distribution of profits;
- partners’ authority; and
- other issues.
What Paperwork Do I Need to Form a Limited Partnership in Kentucky?
The forms that are required to form an LP in Kentucky can be found on the Secretary of State website. The Certificate of Limited Partnership along with a processing fee should be filed with the Secretary of State.
What Benefits Does Kentucky Give to a Limited Partnership?
There are numerous reasons why an individual may want to structure their business as a Limited Partnership, including:
- Limited liability: Similar to a corporation, an LP shields the personal assets of its limited partners from the debts and legal liability of the company. However, as noted above, a limited partnership must have at least one general partner that is personally liable for all claims made against the LP;
- Pass-through tax entity: An LP is taxed as a pass-through entity and avoids the double tax that is associated with corporations. This means that the Limited Partnership itself is not taxed;
- Instead, the partners are taxed according to their individual tax bracket when they receive a share of the LPs profits; and
- Survivability: In contrast to a general partnership, LPs do not have to be reformed every time a partner passes away; and
- Late filing: An existing general partnership can convert to a limited partnership at any time if it fulfills the requirements.
What Disadvantages Does Kentucky Give to an LP?
Although the limited liability and the ability to avoid the double tax that is associated with corporations may be appeal, there are certain disadvantages to structuring a business as an LP, including:
- Filing and fees: Unlike a general partnership or sole proprietorship, an LP requires filing formation forms and payment of some administrative fees which can cost upwards of $50 for initial filing, $15 in yearly registration fees, and may require hiring lawyer; and
- General partner liability: Unlike limited liability companies or limited liability partnerships, a limited partnership requires at least one general partner that is personally liable for the claims made against the LP.
What if I Have a Dispute that Involves a Limited Partnership?
As noted above, one of the main factors that separates all three categories of partnerships is the amount of liability which may be attributed to each partner. This helps to determine which of the partners should be held liable for the financial losses of the partnership.
As previously noted, a limited partner is only liable to the extent of the investment that they made to the limited partnership. If the partner, however, was acting outside of the scope of their duties as a limited partner, it is likely that they will be held personally liable for any losses or injuries that they caused.
For example, if a limited partner holds themselves out as if they are a general partner and makes management decisions or represents themselves as a general partner with that ability to a third party, then the limited partner may be held personally liable for their actions. In contrast, if the limited partner was acting within the scope of their duties, which are typically outlined in the partnership agreement, it is more likely that the overall limited partnership will be responsible for any injuries or losses that result.
In certain cases, multiple partners in the partnership may be jointly liable either to the partnership or held responsible for paying damages awarded to a plaintiff. This depends on the individual facts surrounding the case as well as the liability agreement created between the partner and their partnership organization.
Should I Hire a Lawyer?
If you have any issues, questions, or concerns related to a limited partnership, or any other type of partnership in Kentucky, it may be helpful to consult with a Kentucky corporate lawyer. Your lawyer can assist you with forming a limited partnership, drafting a partnership agreement, and resolving any disputes that arise related to the limited partnership.
