Forming a limited partnership is an exciting step towards making your commercial goals and objectives a reality. But how do you ensure that every partner in the business understands what’s expected of them? And how do you shield yourself from excessive liability if anything goes wrong?
Well, the answer is a limited partnership agreement, or “LP” agreement. Below, our team explains what a limited partnership agreement is, who needs one, and why it matters.
What Is a Limited Partnership?
A limited partnership is a corporate structure whereby two or more people go into business together. Typically, limited partnerships include:
- General partners who run the business and oversee the day-to-day management; and
- Limited partners who invest in the business but don’t have any say over its management.
General partners assume full financial responsibility should anything go wrong. This means they can be held personally liable for partnership debts. Limited partners, in most cases, are only liable to the extent of their investment.
In IL, the Uniform Limited Partnership Act (2001) governs how partnerships are formed, managed, and dissolved. Check the laws for your state. Gordon Law is based in Chicagoland, and we can help you form a limited partnership in Illinois or any other state.
What Is a Limited Partnership Agreement?
A limited partnership agreement is a contract outlining the working relationship between members of the partnership. You can think of it like a roadmap, or rulebook, for how the partnership is managed.
Every LP agreement should:
- Outline the rights and responsibilities of each partner in the partnership;
- Clarify how profits, losses, and tax matters are handled;
- Establish rules for how disputes should be managed; and
- Confirm how the partnership can be dissolved, or brought to an end.
Limited partnership agreements can be highly complex––especially if there are multiple partners involved––but even smaller partnerships could require a fairly detailed partnership agreement. When drafted by a professional, this important contract can prevent expensive lawsuits in the future.
Who Needs a Limited Partnership Agreement?
So, who needs a limited partnership agreement? You should have an LP agreement if:
- You’re about to start a partnership with another individual; or
- You’ve already filed a Certificate of Partnership with the Secretary of State but want a contract in place before commencing operations.
Unsure if you need an LP agreement? Our experienced team can explain whether such an arrangement is right for you.
Limited Partnerships vs. Limited Liability Company (LLC) Partnerships
Just to be clear, in this article, we’re talking about limited partnerships rather than limited liability company (LLC) partnerships. They sound similar, but they’re entirely different entities! For help with LLC partnership agreements, or to discuss which business structure suits your needs, reach out to our lawyers for a consultation.
Are Limited Partnership Agreements Legally Required?
No. There’s no legal requirement for a limited partnership agreement in Illinois or any other state. However, just because it’s not legally required doesn’t mean you shouldn’t have one! Let’s consider why it’s so beneficial.
Benefits of a Limited Partnership Agreement
There are four specific advantages to having a limited partnership agreement.
- Dispute Resolution: Should a dispute or legal issue arise, you can fall back on a well-drafted limited partnership agreement to manage the situation.
- Legal Certainty: Every partner should clearly understand their respective rights and responsibilities. The LP agreement is critical to providing this clarity.
- Stable Transitions: An agreement lets you specify when the partnership can be dissolved and what steps you’ll take to wind the business up seamlessly.
- Tax Efficiency: You can use your agreement to outline how income and deductions pass through to each partner––and how taxation will be managed.
Put simply, a limited partnership offers the certainty you need to let you focus on your commercial goals rather than resolving disputes!
Why You Should Hire a Lawyer Before Signing a Limited Partnership Agreement
Tempted to write your own limited partnership agreement? Well, you could use a template, but here’s why you might consider seeking legal advice first.
Bottom line? Limited partnership agreements are legally binding contracts. They can have significant legal and financial consequences, should anything go wrong. An experienced contract lawyer can help to protect your best interests and limit your liabilities.
What to Include in a Limited Partnership Agreement
It might sound obvious, but every LP agreement should begin with the partnership name. You may also want to include the names of the respective partners. But beyond these basic details, what else should you include?
Well, it varies considerably depending on many factors, such as the number of partners, the business objectives, and the ownership structure. However, here’s a summary of the main clauses you’ll typically see in any IL limited partnership agreement.
- Business Objectives: Every limited partnership agreement should include a succinct description of the partnership’s goals and objectives. This ensures that all partners are on the same page in terms of what they hope to achieve from the partnership, and how they’ll know if the business is on the right track.
- Ownership and Contributions: The LP agreement should clearly establish the level of contributions made by each partner. For example, this often means that the higher your contribution to the partnership, the higher your ownership percentage.
- Partnership Authority and Decision-Making: Be specific about which partners have decision-making authority and the extent of their authority. For example, general partners are typically responsible for the day-to-day decisions influencing the partnership, but limited partners may still have a say on decisions with much wider implications i.e. decisions impacting the partnership’s continuity.
- Profits and Losses: Set out how profits and losses are divided so there’s clarity for everyone involved. You have options; for example, you might divide based on ownership stake, or you can opt for an equal split among all partners.
- Taxation: Limited partnerships help to avoid “double taxation” since partners report income and deductions on their own tax returns without also paying tax at the corporate level. Taxation in limited partnerships is nuanced, though, and the rules can be complex. Legal advice from experienced tax lawyers is advised before signing any LP agreement for this reason.
- Voting Rights: Although limited partners typically have little to no voting rights, the exact terms of any voting rights should be laid out in the LP agreement. Such a clause can avoid unnecessary disputes down the line.
- Dissolution Criteria: Partners should agree on “triggers” for when the partnership can be dissolved or brought to a close. Such triggers might include a partner’s death, a breach of contract, or fulfillment of a commercial aim.
- Dispute Resolution: Disputes can arise in even the most successful partnerships. Ensuring that your agreement includes rules for how any legal issues are managed can make dispute resolution as stress-free as possible.
Remember, each limited partnership agreement is unique. You may need far more––or at least far more complex––clauses before your agreement protects you like it should. Our business lawyers are happy to help if you need guidance on what your specific agreement should include.
Do You Need a Limited Partnership Agreement? Contact the Gordon Law Team Now!
Are you considering forming a limited partnership in Illinois? Don’t hesitate to contact Gordon Law. From drafting contracts to advising on tax liabilities, we’ve been supporting business owners across IL, the United States, and the world for over 10 years. Whether you need help choosing a business structure, or you want help with your partnership agreement, we’re waiting to assist. Give the team a call at (847) 580-1279 to learn more about business and commercial services at Gordon Law.
