A rough definition of limited partners
Limited partners are also called silent partners. They own a part of the company, but they are not liable for a debt amount that exceeds their investment amount. They are called silent partners for a reason. As their name suggests, they are silent partners because they have restricted voting power on the business. Also, they do not involve themselves daily in the business. Some limited partners can be personally liable once they get an active role in the business. Learn more about this and everything related to it.
General partners and businesses
Let us start by defining what a limited partnership is all about. Limited partnerships should have at least one general partner and a minimum of one limited partner. A general partner is responsible for making daily decisions for the business. He receives compensation for being in control of the management of the day-to-day operations. Hence, he is the one personally liable if the company incurs any debts.
In another scenario, we have mentioned that limited partners can become general partners under certain conditions. It is possible only if the limited partners spend more than 500 hours in the partnership.
Limited partners and business
One state may have different laws from another. But most state laws usually say that limited partners do not have a total voting power like the voting power that a general partner has. They only bought the partnership shares mainly for investments and not for anything else, so they do not have to bother getting involved in the business. Hence, they do not have an obligation on behalf of the partnership. They also do not have liabilities related to the partnership’s debts because they do not manage the business. If there is a situation that involves lawsuits and suing, the general partner is the one that answers to repayments that the partnership owes to the creditors. However, as we mentioned, if the limited partner takes on an active role in the business, he will also be responsible for everything we said.
According to IRS, if the general partner gets compensation for the daily business decisions, the limited partner receives a passive income from the business. Also, a limited partner’s loss related to the company operations should not be more than his investment amount.
Rule and regulations variation
Limited partners can have a say on some issues depending on the state. Some allow them to vote if the matter should affect the partnership’s continuity and basic structure. They may vote if the issue is about termination of general partners or the partnership itself, sale of a few of all company assets, variations in the partnership agreement, or issues with the same weight.
General partners, limited partners, and taxes
Limited and general partners are both pass- and flow-through entities. It means that everyone is responsible for partnership income share taxes instead of the partnership itself. The only difference among them is that limited partners pay self-employment taxes because they technically are not involved in the business. Hence, the IRS can only consider their income as passive and not earned.
A mini summary
Limited partners are silent partners who only invest but do not manage. The liability should not be more than the invested amount on the business. A limited partnership should have at least one general and limited partner.