What’s the Skinny on Limited Partnerships?

Rincker Law Business/Commercial Law Leave a Comment

As I noted in this post, a limited partnership is choice of entity that could be utilized by a farm or agri-business.  With limited partnerships, there are two classes of partners:  (1) general partners and (2) limited partners.  This differs from a general partnership in several ways.

The general partners are really the ones “running the show” by controlling most business operations including day-to-day responsibilities; however, that control comes at a price.  General partners have unlimited personal liability for all debts, liabilities and obligations of the limited partnership.  Please note that a general partner need not have the largest ownership share — even with a small share (e.g., 1-2%), a general partner has most of the control.

Conversely, limited partners have a liability shield awarded to them for the debts, liabilities and obligations of the limited partnership.  But when receiving this liability shield, the limited partners give up their control in the business operations and receive limited voting rights on certain activities such as the admission of new partners or on the dissolution and liquidation of the limited partnership.  If any of the limited partners become involved with the day-to-day operations then they may lose their liability shield.

So this isn’t a perfect scenario leaving the general partner at risk for debts and liabilities of the limited partnership; however, it’s a solid improvement from a general partnership where all partners are liable for the debts of the partnership.  This choice of entity may be appropriate for an agri-business that is participating is activities with very little liability risk.

For example, if I started a livestock photography business and my parents, brother and a few friends decided they wanted to help out with start-up expenses, I could be the general partner while my family and friends were limited partners.  In this scenario, because I lacked the money for start-up expenses, I might only have 10% equity in the limited partnership while my family and friends (the limited partners) held 90% of the equity.  However, I still would have sole control over all aspects of my business.  Though any business, including a livestock photography business, bears certain risks, I’m willing to solely bear that risk.

On the flip side, if I started a direct farm marketing business selling food products direct to consumers, I would not want to bear all the financial responsibility for potential liability arising from a food safety issue.  I would probably prefer a limited liability company in that scenario where all members would have a liability shield.

Additionally, keep in mind that start-up expenses for forming a limited partnership are cheaper than a limited liability company or a corporation.  This should be a factor when determining the choice of entity to best meet your needs.  The publication requirement for limited liability companies, depending on county, can be expensive.

There’s no one choice of business entity that fits every farm and agri-business.  You are encouraged to speak to a lawyer licensed in your jurisdiction to help determine the right fit for you.

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