Partnerships are one of the most common entities in business. A limited partnership (LP) allows the partnership to have both general and limited partners. A general partner takes an active role in the management of the business. A limited partner is comparable to a “silent investor.” A limited partner invests in the partnership but does not actively participate in its operation and management.
The process of forming a limited partnership varies from state to state. The Revised Uniform Limited Partnership Act governs the creation and management of LPs in Tennessee. The Secretary of State registers LPs.
What Are the Requirements for a Limited Partnership in Tennessee?
An LP in Tennessee needs only one general partner and one limited partner, although it can have more. If a partnership operates under an assumed name (something other than the partners’ surnames), it must register the business’s name with the state. Additionally, the business must designate its status as a limited partnership status by putting “L.P.” after its name.
Before applying to reserve a Tennessee business name, prospective partners would want to do a Business Name Availability search with the Secretary of State. When they have confirmed that their desired name is available and meets all of the state’s requirements for a business name, they may reserve it for a period of 120 days by filing an Application for Name Reservation with the Tennessee Secretary of State.
In addition, prospective partners must designate a registered agent for their LP. A registered agent is a person who is authorized to accept important documents, such as the paperwork that initiates a lawsuit, for a business. A registered agent has to be physically present in Tennessee. If a person needs help selecting a registered agent, a business lawyer can help with the process.
The State of Tennessee does not offer a general business license that covers all business types. The type of license or permit that a particular LP requires depends on the nature of the LP’s goods or services and where it is located.
If an LP’s taxable sales exceed $10,000, it must obtain a standard business license. LPs whose taxable sales are less than $10,000 may still be required to apply for a minimal activity license. The Registration and Licensing Section of the Tennessee Department of Revenue website offers information about licenses.
It would also pay to check local requirements. The Licenses and Permits Section of the Tennessee state government also has helpful information. For any possible city or county requirements, a person would want to check with the city or county governments.
These are simply the technical requirements of Tennessee state law for setting up and registering an LP in Tennessee. While not required, prospective partners may want to have an experienced business lawyer draft a comprehensive partnership agreement.
Tennessee law allows LPs to have either an oral or written partnership agreement. A partnership agreement defines the rights and responsibilities of both general and limited partners. For example, a partnership agreement may indicate how profits are to be distributed, how disputes are to be resolved, and under what circumstances the partnership would dissolve.
These are only some issues that a comprehensive partnership agreement would address. It is a best practice to have a written partnership agreement that is tailored to the needs of a particular group or partners.
What Paperwork Do I Need to Form a Limited Partnership?
To create a limited partnership, the prospective partners must file a Certificate of Limited Partnership with the Secretary of State for the State of Tennessee. This form can be submitted either online or via the United States Postal Service. The filing of additional paperwork may be necessary if the partners plan on operating their business under an assumed name.
The Certificate of Limited Partnership should include the information that follows:
- The name of the partnership,
- The name and address of the partnership’s registered agent,
- The principal address of the business,
- The names, addresses, and signatures of the general partners, and
- Any other provisions the general partners wish to include.
In Tennessee, an LP dissolves after 50 years unless its Certificate of Limited Partnership sets a different timeline.
What Benefits Does Tennessee Offer to Limited Partnerships?
Limited partnerships have specific benefits. First, an LP does not have to pay state or federal income taxes on its profits. Instead, its income passes through to its partners, who report this income to the Internal Revenue Service (IRS) and the Tennessee state taxing authority and pay any tax owed. However, an LP may still have to pay state franchise and excise taxes.
Still, LPs need to file an annual information return with the IRS, in which the partnership reports its business income, deductions, gains, and losses for the year.
And, if a person is a limited partner, they may not be personally liable for the business’s debts and other financial obligations of the partnership above and beyond their initial investment. As long as a limited partner does not take an active role in the partnership’s management, a limited partner’s personal assets cannot be reached to satisfy the LPs debts.
The general partners have full management and control of the business and full personal responsibility for all debts and liabilities.
What Disadvantages Are There for a Limited Partnership in Tennessee?
Again, the general partners of an LP are personally liable for all of the debts of an LP, such as legal judgments. This means that a general partner’s personal assets can be seized to pay off a debt or judgment incurred by the LP. If a group of people forms a limited partnership, general partners should consider purchasing liability insurance to help offset their risk.
Another major difference between a general partnership and an LP in Tennessee is that a general partnership is not a formal business structure. This means prospective partners do not need to file a single formation document with the state. They do not have to pay any formation fee. A general partnership is formed when the partners start doing business together.
As noted above, there is a formal formation process for an LP in Tennessee, and it involves paying a formation fee. Of course, all partners in a general partnership are general partners with full personal liability for the partnership’s financial obligations.
Tennessee requires all LPs to file an annual report. This can be done easily online through Tennessee’s Business Services web page.
Alternatively, people who want to form a business can consider creating a limited liability partnership (LLP). In an LLP, all partners have limited liability. However, different rules and procedures apply to LLPs in Tennessee. A business lawyer can help decide which business structure is best for a particular group of people and their business purpose.
Should I Hire a Lawyer?
While completing a form is simple, a lot more goes into structuring a limited partnership. For example, prospective partners should create a legally binding partnership agreement and evaluate liability insurance policies. They have to deal with ongoing reporting and other legal obligations.
A Tennessee corporate lawyer can help you follow the correct procedures and establish a limited partnership tailored to your partners’ needs.
