In this week’s edition of the Small Business Series we are discussing general and limited business partnerships.
Title 54, of the Oklahoma Statutes Annotated, governs partnerships. Business partnerships can be either general or limited and exist as long as profits, losses and costs of a business are shared. Limited partnerships (LPs) have two sets of partners, namely one or more general partners who have personal liability and one or more limited partners who are not personally liable for the business debts. Risk adverse business owners prefer this option. Limited partnerships are typically preferred in a business setting where there is a high financial risk. Forming a limited partnership will allow you to generate capital investments from passive investors by limiting their liability.
- Generally, pass-through taxation is applicable to limited partnerships, meaning that the tax burden is passed on to the partners instead of the partnership itself. Thus, profit earnings are passed on to the partners in the form of wages, income, and profit payments and each partner pays tax that is proportionate to his individual share of profits.
- The liability of each partner does not exceed his capital investment in the company. 54 §1-401(a).
- A business can obtain much-needed investment capital by giving more passive investors the option of reducing their risks by becoming limited partners.
- Since there is no direct involvement of limited partners in the management of the business, general partners enjoy full autonomy and have the right to make important business decisions, so long as they abide by the business judgment rule. 54 §500-302A.
- A person may be a general and a limited partner of the partnership. 54 §500-113A.
- According to 54 §500-303A, in the event of a lawsuit the names of the limited partners cannot be included in the list of defendants.
- Certain tax rules restrict LPs from claiming partnership losses beyond $25,000 per year. If losses exceed this amount the partners can carry forward the amount of passive investment losses to be claimed in the tax returns for the following year. This limit is exercised each tax year and is applicable to all those who are only concerned with the capital aspect of business ventures and in no way interfere in the business affairs.
- General partners are responsible for paying self-employment taxes.
- It is fairly easy to compute tax if partners have invested only cash. However, if non-cash financing options, such as vehicles or real estate, are involved more complicated tax rules are applicable.
- A limited partner does not have the right or the power as a limited partner to act or bind the limited partnership. In order for a limited partner to act or bind the limited partnership, the limited partner would have to step out of his role as a limited partner and take a role as a general partner. By doing this, the limited partner is forbid from exercising their limited liability privilege. 54 §500-302A.
In order to enter limited partnership, partners need to file the necessary formation documents with the Oklahoma Secretary of State along with the state filing fees applicable.