Updated: Jul 9, 2020
This post should not be construed as legal advice.
Today, we continue our look at business organizations structures that you could potentially utilize when setting up your farm, with a focus on limited partnerships. Remember from our previous partnership discussion, a partnership is a separate legal entity created by two or more individuals (“partners”) who each contribute capital, equipment, and skills and share in profits and losses. Partnerships come in two forms: 1) general partnership and 2) limited partnership. Today we focus on the other form of partnerships, limited partnerships.
A limited partnership is made up of at least one general partner and one or more limited partners. General partners manage the business and take all the business risks. (See the previous post on general partnerships to get an idea on the types potential risks general partners face). The limited partnership will also be taxed in a way similar to that of a general partnership.
With limited partnerships, we start to see sources of available capital expand beyond personal contributions and borrowed capital. Limited partnerships allow for investments by limited partners. Limited partners can contribute investments into the business and will only be liable for that investment — not full liability.
Limited partners have no management responsibilities and their liability is limited to what they have invested. For example, you invest $1,000 in your friend’s new company as a limited partner. The company sells faulty products and is now facing lawsuits from injured consumers potentially totaling $1 million. If the company is found liable, then the most you would be out is your original $1,000 investment since you are a limited partner. General partners, on the other hand, would be at risk for the full liability.
To form a limited partnership, all the general partners need to file a certificate of limited partnership with the Maryland Department of Assessments and Taxation. That certificate must have the name of the limited partnership, address of the principal office, name and address of resident agent (the person responsible for receiving service of process, or documents used to notify you of a legal action being filed), whether the limited partnership is perpetual or terminates on a certain date, and anything else the general partners decide to include.
The name of the limited partnership must contain either LP or L.P. in the name. For example, Family Farms LP would be a valid name for a limited partnership in Maryland. One other point on names of the limited partnership: the name cannot contain the name of a limited partner. There are two exceptions to this: 1) if the name is also a general partner’s name and 2) if the limited partnership conducted business under that name before including the limited partner with the same name.
One special type of limited partnership is the family limited partnership. Here the partnership is limited to family members. Some family members will be general partners (typically those taking active roles in the management of the family business) and some will be limited partners (typically those in members not actively involved). This form would allow those family members actively running the business to continue to do so and allow other family members to receive income from the family business. These potentially have use as estate planning and business transition tools; you should check with your tax advisor and attorney to determine if a family limited partnership is a good fit for you and your goals.
As we continue on you will see the potential benefits of other types of business organization structures. Remember, before deciding which type of structure is perfect for your farm, talk with your attorney and tax preparer to understand how switching to a certain business organization structure could impact your individual situation. While we are giving you broad overviews of each structure, those professionals can help you understand how it will impact your personal situation.