A limited partnership, also called an LP, is a way to structure a business so that the members, called partners, have limited liability. LPs also have the structural and tax flexibility of a partnership.
The limited liability aspect of the limited partnership protects the assets of the limited partners from any debts, losses, or legal claims that are related to the limited partnership. It is important to note, however, that this does not apply to the general partners.
Similar to a partnership, a limited partnership is free of many of the organizational requirements of a corporation and corporation taxes. A limited partnership requires at least one limited partner and at least one general partner.
What are the Requirements for a Limited Partnership?
A limited partnership can only be formed under state law. Because of this, the requirements for LPs vary by state.
There is a large amount of flexibility in creating and structuring a limited partnership in North Carolina. There are, however, a few mandatory requirements:
- Choosing a name for the limited partnership;
- Choosing a registered agent for the limited partnership;
- The signature of the general partner; and
- The certificate of limited partnership.
When choosing a name for an LP in North Carolina, it must be different from any other business name on record at the North Carolina State Corporation Secretary of State. The name must include one of the following designations:
- Limited partnership;
- Ltd. partnership;
- L.P.; or
- LP.
In North Carolina, every business entity must have a registered agent. This registered agent ensures that any important information or any legal matters will make it to the LP.
The registered agent can be any North Carolina resident or business that is authorized to do business in North Carolina. If it is a business, the business must have an address in North Carolina.
As noted above, all limited partnerships are required to have at least one general partner. This general partner is personally liable for the actions of the limited partnership.
The North Carolina Secretary of State provides a PDF fillable version of the Certificate of Limited Partnership. The following information is required for the certificate:
- The name of the limited partnership;
- The principal office of the limited partnership;
- The name of the registered agent;
- The principal office address of the limited partnership;
- The general information on all general partners; and
- The business address of the registered agent, which must be in North Carolina.
North Carolina does require limited partnerships to submit an annual report. This report can be filed online.
What is a Partnership Agreement?
A partnership agreement is a document that provides the terms and conditions and the rights and responsibilities for the partners involved in the business. It provides information regarding the duties and responsibilities of each type of partner. It also defines the scope of activity for the partnership.
The partnership agreement is essentially a contract which provides legal enforcement for the terms of business operations the partners agreed to. It is extremely important to have this agreement in writing.
In North Carolina, having a partnership agreement is not required. However, having a written partnership agreement is an excellent idea in order to resolve any future issues. These agreements may include information such as:
- Partner contributions;
- Distribution of profits;
- Information regarding each partner, including:
- their name; and
- contact information;
- The duties and responsibilities of all of the partners;
- The allocation of profits and losses for the partners, which are typically equal;
- The scope of the functions and activities of the partnership;
- The goals and mission statement of the partnership;
- Restrictions on management and leadership;
- Information regarding dispute resolution; and
- Information governing termination of the partnership.
In the event of a lawsuit or legal dispute regarding the activities of the partners and the partnership, the court may refer to the partnership agreement. The court will use this agreement to determine what the proper outcome of an issue should be based on the agreement of the partners outlined in the partnership agreement.
What Paperwork Do I Need to Form a Limited Partnership?
The forms that are required to form a business as a limited partnership are available on the website of the Secretary of State. As noted above, the Certificate of Limited Partnership can also be filed with the Secretary of State online, as well as the processing fee.
What Benefits Does North Carolina Give to a Limited Partnership?
North Carolina provides several benefits to limited partnerships in the state. These include:
- Limited liability;
- Pass-through tax entity;
- Survivability; and
- Late filing.
Similar to a corporation, a limited partnership shields the personal assets of the limited partners from the legal liabilities and debts of the company. As previously noted, an LP must have at minimum one general partner who is personally liable for any claims made against the LP.
A limited partnership is a pass-through tax entity. LPs avoid the double tax that is associated with corporations.
The limited partnership itself is not taxed. Instead, the partners are taxed on their individual taxes for receiving a share of the limited partnership’s profits.
Unlike general partnerships, limited partnerships have survivability. This means that an LP does not have to be reformed each time a partner passes away.
An LP can also take advantage of late filing. This means that an already existing general partnership may convert to a limited partnership at any time if it meets the requirements listed above.
What Disadvantages Does North Carolina Give to a Limited Partnership?
While the limited liability and avoidance of the double tax associated with corporations may be appealing, there are also some disadvantages to structuring a business as a limited partnership in North Carolina. These include filing and fees as well as general partner liability.
In contrast to a general partnership or sole proprietorship, an LP requires filing formation forms and payment of administrative fees. These fees may cost upwards of $50 for the initial filing, $200 in annual fees, and may require hiring a lawyer.
Unlike limited liability companies, or limited liability partnerships, a limited partnership requires at least one general partner. That general partner is personally liable for the claims made against the LP.
How are Limited Partnership Disputes Resolved?
Many limited partnerships have internal mechanisms for resolving disputes that may arise. These are often included in the bylaws of the partnership or the partnership agreement.
If the limited partnership’s internal mechanisms are ineffective for resolving the dispute, a legal claim may be required. In some cases, a lawsuit may be filed that results in a damages award which compensates the plaintiff for any losses they incurred.
Should I Hire a Business Lawyer?
Yes, it is essential to hire an experienced North Carolina corporate lawyer to assist you with forming a limited partnership in North Carolina. A lawyer can ensure your forms are completed accurately and completely, help you file the required forms, and ensure your business conforms to the requirements of North Carolina law.
While it may appear that forming a partnership is a simple process, there are many rules, regulations, and considerations for partners forming a business. Having a lawyer involved with your limited partnership will ensure your business has the best chance for success.
