According to Black's Law Dictionary (1991), a limited partnership is a "type of partnership of one or more general partners who manage business and who are personally liable for partnership debts, and one or more limited partners, who contribute capital and share in profits but who take no part in running business and incur no liability with respect to partnership obligations beyond contribution" (p. 928). This definition of a limited partnership is congruent with the provisions of the Uniform Limited Partnership Act that stipulates such a partnership is comprised of one or more general partners and one or more limited partners who are not bound by the obligations of the partnership (Black's, 1991). A limited partnership represents an effective operational structure for asset protection because limited partners are generally liable only for their partnership contributions and not for any partnership debts if they do not participate in the control of the day-to-day partnership business; by contrast, general partners control the partnership and are completely liable for partnership debts (Dedon, 1999).
Although laws concerning limited partnerships vary from state to state, the aforementioned Uniform Limited Partnership Act sets forth general requirements for their creation and operation. For instance, the Secretary of State (2010) reports that in Texas, "The limited partnership operates in accordance with a partnership agreement, written or oral, of the partners as to the affairs of the limited partnership and the conduct of its business. While the partnership agreement is not filed for public record, the limited partnership must file a certificate of formation with the Texas Secretary of State. The Secretary of State provides a form that meets minimum state law requirements" (Selecting a business structure, 2010, para. 2).
1. EASE of FORMATION. In Missouri, forming a limited partnership involves only the filing of a certificate of limited partnership with the state's Corporations Division and the payment of all required fees; however, there are a variety of other issues that must be considered during the formation that will contribute to its success -- or failure -- in the future and these issues are discussed further below.
2. TAXATION. The ultimate goal of any limited partnership is to provide a framework in which there is limited personal liability as to taxation for all owners (Cleveland, Wells & Yashimoto, 1996). According to Gutterman (1994), "For tax purposes, profits and losses from the limited partnership are "passed through" to each of the general and limited partners in the proportions provided for in the limited partnership agreement" (p. 259). In this area, the general partners enjoy a great deal of latitude concerning the allocation of profits and losses. In this regard, Gutterman advises, "As a general rule, the partners are free to allocate profits and losses in any manner they decide, even if the allocations are disproportionate to the capital contributed to the partnership, provided that the allocations have 'substantial economic effect' under Section 704(b) of the Internal Revenue Code of 1986, as amended" (1994, p. 259).
In addition, in those cases where there are family relationships between the partners such as a married couple, there also some worthwhile income and estate planning reasons why assets should be transferred to a family limited partnership:
1. It allows a couple to shift income to children or other relatives through gifts of limited partnership interests. Income from these limited partnership interests is then taxed to the limited partners. If the parents together own 10% of the partnership and the partnership's income is $100, the parents would be taxed on only $10 of income.
2. Once the interests have been given away, they generally no longer are in the couple's gross estate.
3. Couples can take advantage of the gift tax provisions by giving $20,000 worth of limited partnership interests each year to a limited partner. These independent reasons for forming a limited partnership may help demonstrate there is no fraudulent intent on asset transfers to the partnership if this strategy subsequently is challenged in court (Dedon, 1999, p. 61)
3. EXTERNAL LIABILITY.
According to Dedon (1999), partnerships are confronted with certain special risks that can doom a business to failure because partnerships are liable for potential claims against their partners (Dedon, 1999). According to this authority, "General partners may be liable for against their personal assets resulting from engagements performed in distant cities of which he or she had no knowledge. Failure to adopt a plan that protects assets from creditors can have tragic consequences for those who are sued" (Dedon, 1999, p. 61). There are some limits as to what and how much can be assessed against partnership assets. In this regard, the same type of affirmative asset...
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