A Limited Partnership Agreement is a legally binding document that establishes an LP structure, delineating the roles, responsibilities, and profit-sharing of general and limited partners while limiting the latter’s liability to their investment in the business.
Sometimes you want to go into business with a friend, partner, or colleague. Each person who agrees to operate a business together has the potential to share in the company’s profits, losses, and taxation.
It is best to put everything in writing with a limited partnership agreement to ensure things run smoothly and there is no confusion between partners.
What is a Limited Partnership Agreement?
This company formation is where at least one person is a general managing partner and at least one other person is a limited partner. The critical difference exists in what the limited and general partners can do and what liabilities each may face.
The limited partner gains access to the company by contributing upfront with finances or other assets. In exchange, they receive limited ownership interest, profits, and liability for financial loss or legal matters.
The limited partner in this arrangement cannot participate in day-to-day decision-making, oversee anyone working for the company, or make any other significant decisions.
The general partner in the arrangement is personally liable for financial losses and responsibility for legal matters besides making day-to-day decisions about the company.
General partners receive more profit, are personally liable for a larger share of income tax where applicable, and have more weight when deciding the company’s future.
Any other person interested in participating or investing in the company can see which partner is more liable for decision-making, profits, losses, and legal matters. A properly executed agreement provides a level of transparency from the beginning.
When to Use a Limited Partnership Agreement?
The best time to use this type of agreement is when you are starting a business with one or more partners and:
- Some of you want to be more actively involved in day-to-day business than others.
- Some of you want to be personally liable for some business debts and taxes, while others don’t.
Each partner must be evident of what activity levels they want to be involved in and what levels of liability are fair for each activity.
What to Include in a Limited Partnership Agreement
The limited partnership agreement template doc should include several elements:
- Name of the business
- Identifying information for all partners
- Each partner’s role
- Division of profits and losses
- Adding new partners to the business
- Handling retirement or death
- Decision-making for disputes
- Managing buyouts
- Which state will govern your agreement
You will also want to include the amount and types of contributions each person made at the beginning of the company and what they are contributing upfront for new partners when joining.
Contributions may include time, money, stocks, bonds, real property, real estate, services, etc. General partnership agreements have much of the same information.
When you’ve completed your agreement, include information on how to amend it to a limited partnership agreement.
Limited Partnership Agreement Sample
Below, you will find a sample and a Limited Partnership Agreement template you can download in PDF or Word format:
