Partnerships are associations between two or more individuals who carry on as co-owners of a business for profit. Partnerships are formed when the parties to a business have the ability to share in the profits of the business as well as the right to control the business.
When these conditions are met, the parties will be referred to as partners. There are three different types of partnerships, which include:
- General partnerships;
- Limited liability partnerships; and
- Limited partnerships.
The type of partnership which is formed by the parties will determine the amount of liability that the individual partners may face as a result of being involved in the partnership.
What is a Limited Partnership?
Limited partnerships, often referred to as LPs, are created when a general partner and a limited partner combine their resources and efforts in order to pursue a business. The limited partner typically provides assets or cash to the LP.
The general partner, on the other hand, is usually responsible for the day-to-day operation of the LP. Generally, an LP is designed to protect investors from the debts and obligations of the business in which the LP invests.
The partners in an LP receive certain legal rights which act as protection against individual liability for debts, losses, or violations which are directly related to the limited partnership. This is different from a general partnership, in which each partner is individually and jointly responsible for the losses incurred by the partnership.
Partners in a general partnership may be at a disadvantage, especially if they play only a minor role in the partnership or if they contributed fewer funds or assets than the other general partners. With a limited partnership, there must be at least one general partner who is responsible for making management decisions and for day-to-day operations and one limited partner.
The limited partner has only limited powers related to the partnership. The limited partner can only be held responsible up to the extent of their investment in the LP.
Limited partners, therefore, are mainly responsible only for their investment in the LP.
Is it Possible to Withdraw From a Limited Partnership?
In contrast to a general partnership, a partner in a limited partnership may withdraw from the LP without subjecting the LP to an automatic dissolution.
This is one important feature of an LP that distinguishes it from a general partnership. When a limited partner determines they will withdraw from the LP, they will be required to provide notice to the LP as well as file the proper paperwork with the state.
In addition, the rest of the partners in an LP will be required to buy out the partner who is withdrawing. In contrast, when a partner withdraws from a general partnership, it usually results in the dissolution or termination of that partnership.
General partnerships can dissolve when any one of the partners passes away or becomes incapacitated.
What are the Requirements for a Limited Partnership?
The requirements for conducting a business as a limited partnership are less than those which are required for other types of business entities, such as corporations. Key elements that limited partnerships must have include:
- A named registered agent;
- An initial notice of doing business;
- Annual reports, for tax purposes; and
- A tax identification number.
It is important to contract a lawyer if an individual has any questions regarding the formation of a limited partnership. Failure to comply with the laws of New Jersey for forming limited partnerships may result in the LP losing the legal protections which are granted to LPs in the state.
What Paperwork Do I Need to Form an LP?
New Jersey has enacted the New Jersey Business Action Center (BAC) to manage the paperwork filing for businesses in the state. The BAC permits businesses, including limited partnerships, to:
- Register as a new business;
- Change tax records;
- Amend incorporation documents;
- File annual reports;
- Reinstate a revoked business; and
- Dissolve a business entity.
The BAC is a valuable resource for individuals who are seeking to conduct business in New Jersey. It is important to note that there are numerous additional services provided by the BAC which are not discussed here.
What Benefits Does New Jersey Give to a Limited Partnership?
One of the most important benefits that limited partnerships provide is taxation. An LP is generally not taxed at the business level.
Instead, an LP is taxed at the personal level of the partners. This voids double taxation.
Although an LP is taxed at a personal level, the debts and obligations of the LP, in general, remain with the LP as the partners in the LP are not personally liable for those debts and obligations.
What Disadvantages Does New Jersey Give to a Limited Partnership?
Limited partnerships are governed by the laws and regulations of the State of New Jersey. However, they are also controlled by internal documents, such as operating agreements, which are agreed upon by the general and limited partners of the LP.
Although it may be time-consuming to establish proper rules for conducting the LP, it is a critical step. It is essential that an LP have clear rules for how the business will be managed.
What if I Have a Dispute that Involves a Limited Partnership?
As previously noted, one of the main factors which separates the three types of partnerships is the amount of liability which may be attributed to each partner. This will assist in determining which of the partners should be held responsible for the financial losses of the partnership.
Normally, a limited partner is only liable to the extent of their investment in the LP. If, however, the partner was acting outside of the scope of their duties as a limited partner, they will be held personally liable for any injuries or losses which their conduct caused.
For example, if a limited partner holds themself out as a general partner and makes management decisions or represents themself as a general partner to a third party, they may be held personally liable for their actions. In contrast, if a limited partner was acting within the scope of their duties, which are typically outlined in the LP’s partnership agreement, it is more likely that the LP will be responsible for any injuries or losses which result.
In certain cases, multiple partners in a partnership may be jointly liable to the partnership or will be held responsible for paying damages which are awarded to a plaintiff. This will depend on the facts and circumstances of each case as well as the liability agreement that was entered into by the partner and the LP.
Should I Hire a Business Lawyer?
It is essential to have the assistance of a New Jersey corporate lawyer for any issues, questions, or concerns you may have related to a limited partnership in New Jersey. Having an attorney involved in your business from the beginning will help ensure that the LP complies with New Jersey laws and will be set up for success.
If you have already formed an LP, your lawyer can review your registration and any documents related to your LP to ensure they are clear and enforceable.
