How to Start a Limited Partnership
If you're looking to start a business with a partner, a limited partnership might be the perfect option for you. This type of partnership allows one partner to have control over the business while the other partner is considered a limited (or silent) partner. This means they might not have as much say in the day-to-day operations but are still entitled to a share of the profits.
One aspect to keep in mind when starting a limited partnership (which we'll walk you through in just a bit) is insurance. It can be important to have insurance coverage to help protect your company from potential risks, such as property damage, injury claims, or lawsuits.
By ensuring that your business has adequate coverage, you can avoid costly expenses that could cause financial damage. But don't worry; we'll delve even further into insurance coverage a little later in this article. First, let's get started with the steps and factors to consider when starting your limited partnership.
What is a Limited Partnership?
As mentioned, a limited partnership is a business structure in which two or more people come together to run a business. However, instead of sharing responsibilities, only one partner has unlimited liability and control. The others are "limited partners" with less control.
The biggest difference between a limited partnership and other types of partnerships or business structures is that limited partners might not be liable for the debts or obligations of the business beyond their initial investment. This means that limited partners may have less control over the day-to-day operations of the business, but they might also have less risk.
How Does a Limited Partnership Work?
So, you're interested in starting a limited partnership? Congrats! This can be a great way to work with a friend or colleague on a new business venture.
But how does a limited partnership work on a day-to-day basis?
If you're the limited partner, you're investing money into the business, and that's pretty much it. You might not be involved in the day-to-day operations or be held personally responsible if the business takes a hit.
If you're the general partner, then you're likely running the show. You're the one making decisions on behalf of the company and responsible for the day-to-day operations. But be warned; you might also be held personally responsible if things go south.
For example, let's say you and your friend decide to start an ice cream shop. You've got the cash, and your friend is a fabulous dessert connoisseur. You decide to be the limited partner and invest the money, while your friend is the general partner and runs the shop.
Or, if you own a salon and want to expand your practice, you could bring on another stylist as a limited partner. They invest money and work for you while you make decisions as the general partner. You can offer to pay them back with interest or give them a portion of the profits; the arrangement is up to you.
Pros & Cons of a Limited Partnership
A limited partnership has advantages and disadvantages, like other types of business structures or partnerships. Knowing the pros and cons of a limited partnership can help you make a more informed decision about whether it is the right choice for you.
Advantages of a Limited Partnership
The silent partner in a limited partnership has limited liability, which means their personal assets may be safe if the partnership faces financial difficulties or lawsuits. This can be a big advantage if you're the silent partner.
What if you're the general partner? You can enjoy the advantage of capital contribution. Investors can contribute capital to the partnership, allowing the business to grow and expand. This can be a significant advantage compared to other types of partnerships.
Additionally, limited partnerships are considered pass-through entities, meaning profits and losses flow through the business to its partners, helping to reduce the overall tax burden on the partnership.
Disadvantages of a Limited Partnership
The biggest drawback here is that the limited partners typically aren't involved in the business's day-to-day operations and can't make business decisions. They are instead passive investors, leaving control to the general partners. If you want to invest money but also want to have some control over the direction of the business, you might consider another business structure.
For general partners, there's also the issue of liability. While limited partners enjoy limited liability, general partners aren't so fortunate. They may be personally responsible for debts or obligations the partnership incurs. Consider what this could mean if the business doesn't thrive or you experience a major accident like a cyber-attack or inventory theft.
Finally, creating a limited partnership can require significant legal assistance, which can be costly. General partners should also consider paying for liability insurance coverage to help protect their assets.
The Cost of Forming a Limited Partnership
One of the biggest expenses is the formation process itself, which can include:
- Filing fees
- Legal fees
- Accountant fees
In addition to formation costs, there are ongoing expenses that come with operating a limited partnership, such as rent and utility bills.
Another important consideration is the cost of insurance. As a limited partnership, you might want to obtain certain types of insurance to help protect your assets. This could include general liability insurance, property insurance, and Worker's Compensation insurance.
How to Start a Limited Partnership
Ready to form a limited partnership? While it might be best to consult with a business advisor, these are some general steps you can follow to create your business.
Step 1: Choose a General Partner
The general partner manages the business and can be personally liable for debts or obligations. So, if you're funding the money as a silent partner, it can be important to choose a general partner who is experienced in business management and has a strong understanding of the industry.
Step 2: File a Certificate of Limited Partnership
Once you have selected the partners, you should file a certificate of limited partnership with your state government. The certificate includes the names and addresses of the partners and the name of the partnership. Registering a limited partnership with the state government is a legal requirement.
Step 3: Draft a Partnership Agreement
A partnership agreement outlines the terms and conditions of the partnership. It may include information such as:
- Profit and loss sharing ratios
- Management responsibilities
- Exit strategies
It can be essential to have a partnership agreement in place to help avoid conflicts and misunderstandings between the partners. One of our top tips is to hire an attorney to help you draft the agreement. This can ensure that it aligns with your business goals and complies with state laws.
Step 4: Obtain the Necessary Licenses and Permits
You may need licenses and permits to operate your business legally, depending on your industry and location. Research the requirements in your area to help avoid legal issues down the line.
Step 5: Choose the Right Insurance Policy
Insurance can be essential when helping to protect your new business and yourself as a partner. Depending on your industry and the risks involved, there may be different types of insurance policies you should consider. It can be important to speak to an insurance expert to determine the best coverage options for your business.
Limited Partnership Business Insurance
So, you've finally taken the plunge and started your own limited partnership business. Now, as you're setting up your business and getting your permits, it might be time to really look at your insurance options.
At PolicySweet®, we offer a Business Owners Policy, or BOP for short, which can be a great option for limited partnerships. A BOP bundles together three types of coverage in one package:
This means you could be covered in case of accidental damage to business equipment, lawsuits brought against you by third parties, and even cyber-attacks that affect sensitive information stored by your business.
In addition to the BOP, we also offer Workers' Compensation coverage, which may be required by law in many states if you have employees. This can provide financial assistance to your employees if they're injured on the job.
Now, if you're running a home-based business, don't think you're off the hook regarding insurance. Most business owners overlook this, and it can cost them in the long run. Check your state's regulations to see if your home-based limited partnership business requires insurance.
If it does, we also offer HomeHQSM coverage. It's specifically designed for businesses that operate out of a home. It includes general liability, business property, and inventory coverage. You may want to consider this type of coverage even if it is not a requirement to help protect your business and provide “peace of mind.”
Get a Quote
We know you've got a lot to consider when starting a limited partnership. Things can start to feel overwhelming pretty fast. That's why we're here to help make it simple and easy for you to get the coverage you might need to help protect your limited partnership business.
It starts with getting an insurance quote online from us in just a few minutes. If you have any questions about the process, don't hesitate to contact us.