What is a Limited Partnership?

What is a limited partnership?

A limited partnership is the main entity that's used to buy real estate in the private equity world.

It's a type of partnership with at least one general partner and at least one limited partner. And a limited partner could be an individual or it could be a sole proprietor or a company. So, it doesn't have to be a person. And what's interesting is that the same person could also be a general partner and a limited partner long as there are two legal persons who are partners in the partnership.

No profits can be paid out to the partnership if it reduces the initial liability of the limited partners and the general partner. So, you can't pay profits if it's going to reduce your initial contribution.

A limited partnership is set up such that the general partner in the limited partnership has unlimited liability. That means they can go after that person individually. The limited partners have limited liability and are only liable up to the investments that they put in.

The limited partnership is a pass-through entity from a tax perspective. And what that means is there are no corporate taxes. Any income that's earned gets passed through to the individual partners and the general partner.

And it's a very loose setup in the sense that there's no requirement for general meetings or annual meetings.

Who is the General Partner?

Okay. the general partner in a limited partnership is a part-owner of the business and is involved with the operations and also shares in the profits.

The general partner is responsible for the overall management of the business in the partnership. And so the general partner is responsible for the day-to-day business. And as I mentioned, they have unlimited liability and they are responsible for the financial obligations of the limited partnership, including the debts and any litigation.

The general partner is a single general partner, but sometimes there are co-general partners in the setup. And again, they are responsible for the day-to-day operations. There are very few day-to-day operations. It's usually low to mid-range administration.

Now in commercial real estate investing a general partner is a person or a team in charge of the real estate deals and the private equity fund from its inception on through to the end of the fund. In commercial real estate, this could be the real estate development firm. It could be the corporation could be the property manager with years of experience.

Who are the Limited Partners?

So, a limited partner is somebody that does not participate in the managing of the partnership but enjoys number one, the limited liability which we talked about and is not involved in the day-to-day business.

The limited partner is generally the investor only, and they are often referred to as silent partners.

Limited partners invest in capital in exchange for a portion of the profits of the partnership and that's it. The liability of the limited partner is limited to the amount of the contribution that they made as part of their investment. And they share in the profits relative to the amount of the portion of their investment.

The limited partner contributes money or property, but not services and they have to be very careful. If a limited partner spends too much time giving advice or business direction to the limited partnership, it could be determined that they are acting as a general partner, and they could lose their limited liability. So, they must remain passive to ensure that they don't lose that limited liability protection.

A limited partner has the same rights as a general partner to be able to look at the records, inspect the records of the limited partnership, and receive full disclosure of the affairs of the partnership.

Can a General Partner be Removed?

So limited partners can remove a general partner. And the purpose of this removal ability is to provide limited partners to be able to replace that general partner if they see that that general partner is not operating to the best of their ability or the benefit of the other limited partners. So, they could have just-cause for removal, or maybe they want to replace that general partner for other reasons. And that's called a no-fault removal.

And so, the removal is generally implemented through a vote of the limited partners.

The limited partnership could also be terminated and wind-up business affairs upon a change in the relationship between the partners. And in turn, the partnership may be automatically dissolved according to the terms of the partnership agreement. So, there are basic terms in the agreement to replace the general partner and to terminate the partnership.

Okay. So that's everything I wanted to touch on as it relates to a limited partnership and the general partner and limited partners.