A limited partnership is similar to a general partnership exceptthat it has two classes of partners. The general partner(s) havefull management and control of the partnership business but alsoaccept full personal responsibility for partnership liabilities.Limited partners have no personal liability beyond their investmentin the partnership interest. Limited partners cannot participate inthe general management and daily operations of the partnershipbusiness without being considered general partners in the eyes ofthe law.
The general partner can be either an individual or acorporation. One of the more common limited partnership situationsinvolves a silent partner, where one or more limited partnersprovide financing for the venture and the general partners run thebusiness. A limited partnership in this case protects the assets ofsilent partners by limiting their exposure and liability and actsas a conduit to pass current operating profits or losses on tothem.
Most jurisdictions require limited partnership agreements to bein writing and, for the most part, contain the same provisions asthose in a general partnership agreement-with some complexadditions. Legal costs of forming a limited partnership can be evenhigher than for a corporation because in some states they aregoverned by securities laws.
Another aspect of limited partnerships is that in somebusinesses, the limited partner (also called the passive investor)may be subject to special tax liabilities that can offset the taxshelter advantages. The IRS tends to look at these facts on acase-by-case basis.
Limited partnerships file an IRS Form 1065 once a year.Individual limited and general partners include their allocableshare of partnership income or loss on their individual income taxreturns and pay taxes on that share based on their tax bracket.Partners cannot deduct losses greater than their basis in thepartnership, which includes their investment plus any funds loanedto the partnership (except for real estate limited partnershipsthat are governed by special rules).
The 1986 Tax Reform Act limited the amount of losses a limitedpartner can deduct on a personal tax return. If the partnership isexpected to generate tax losses in its early years, your CPA canhelp determine whether those losses will benefit you.
