Primary Benefits of Limited Partnerships
1. Limited Liability
The most significant benefit for limited partners in an LP is the protection from personal liability. Limited partners are typically not personally responsible for the partnership’s debts or obligations, thus protecting their personal assets from the partnership’s creditors.
2. Participation in Profits
Limited partners have the right to share in the profits of the business without being involved in its day-to-day management. This makes LPs an attractive investment vehicle for those who wish to invest in a business without taking on managerial responsibilities or unlimited liability.
3. Tax Advantages
Like other partnerships, LPs are typically subject to pass-through taxation. This means the LP itself does not pay income taxes. Instead, profits and losses pass through to the partners, who report them on their individual tax returns.
Limited Partnerships and Asset Protection
LPs can be valuable tools in asset protection planning. The structure of an LP can protect the partnership’s assets against claims on individual limited partners. Also, through the mechanism of Charging Order Protection (COP), LPs provide a degree of protection against the creditors of individual partners. A charging order limits a creditor’s claim to the debtor-partner’s distributive share of the partnership, without granting any control or decision-making powers over the LP.
The effectiveness of charging order protections can vary by jurisdiction, with some states, such as Arizona, Delaware, Nevada, and Wyoming, offering robust charging order protections for LPs.