The Pros & Cons
| The Pros | • Liability protection for limited partners. • Separate entity from partners. • Ownership can be transferred within the rules of the partnership agreement. • Limited partners' liability is limited to their investment in the business. • Limited partners pay self-employment tax on guaranteed payments only. • No double taxation of profits. |
| The Cons | • Must have one general partner with unlimited liability (unless a LLC). • Limited liability status for damages can be lost for a variety of administration reasons. • Restrictions on partners based on entity type. • Requires a separate tax return. • Requires tracking of basis for partners, both inside and outside the partnership. |
| Is a Good Fit For | • Businesses with partners not actively involved in the business. • Businesses with equity capital needs. • Businesses with exposure to liability. |
Differences
The main differences between a General Partnership and Limited Partnership is the tax treatment and liability of the limited partner.
- Whereas the profits for a general partner are subject to self-employment tax, the profits for a limited partner are considered investment income (unless guaranteed) and are treated the same way as profits from sale of stock.
- A loss passed-down to a limited partner can't be deducted against other income. It must be forwarded to a future year where there is partnership profits to subtract it from.
- A limited partner is only liable for partnership debts up to the amount that they invested in the partnership.