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Limited partnerships are typically used for real estate investing or in situations where
a business is looking to finance expansion. For most small businesses, forming a
general partnership or an S corporation will meet their needs.
In circumstances where they are appropriate, limited partnerships provide many of
the benefits of partnerships and corporations. They provide a way for small
businesses to raise money without taking in new partners, forming a corporation, or
issuing stock.
A limited partnership must have one or more general partners, who have the same
responsibilities and liability restrictions as they would in a general partnership. In
addition, there are one or more "limited" partners, typically investors not involved in
the day-to-day activities of the company.
These limited partners are not personally liable for debts of the partnership, and
they get the same tax advantages as a general partner. However, they do have
significant restrictions. They can not, for instance, be involved in the management of
the company (with few exceptions). If they are, they may become personally liable
for the partnership's debts.
Creating a limited partnership can be as complex and costly as forming a
corporation. It is advisable to hire an attorney to assist you in conforming to the
various filing requirements in your state.
Benefits
- Ability for partnerships to raise money without involving outside investors in
day-to-day business decisions
- Limited partners get limited personal liability and greater tax advantages
Disadvantages
- Complex and costly filing procedures
- General partners still have personal liability for company's debts and actions
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