Before organizing a Limited Partnership, you should seek the advice of your estate planning attorney concerning a multitude of issues. Those issues include selection of the general partner and deciding who will be responsible for the partnership’s day-to-day management.
Also, since a general partner has unlimited liability for partnership liabilities and losses, the desires of the partners concerning liability for the partnership’s business transactions and their desires regarding the protection of their personal assets from partnership liabilities must be examined. Additionally, the level of trust that the partners have in each other must be considered because the actions of one general partner can legally bind the others.
Taxation of business entity issues must also be examined. Limited partnerships are a flow-through entity. This means that the partnership’s income and deductions are reported on each partner’s individual tax return. The partnership itself pays no federal income tax, a significant benefit over corporations, which normally are taxed at the corporate level.
Other tax ramifications should also be considered. Organizing exclusively as a Limited Partnership may foreclose some tax planning opportunities, particularly in the area of employee benefits. A careful planner will make you aware that a corporation can serve as a general partner.
This option may be appropriate because a corporation can provide employee benefits and other planning opportunities not available to partnerships. If a corporation is chosen to act as the general partner, it is possible to have the corporate general partner elect “S Corporation” tax status. This would also provide an opportunity for flow-through taxation at the individual level.