How to Form a Limited Partnership

Forming a Limited Partnership Is Easy, Quick, and Inexpensive These Days

A limited partnership allows a group of people, whether family, friends, or business partners, to pool their assets together in order to form a business. The good news is that with a decent accountant and lawyer, the process of forming a limited liability company can be pretty easy.
A limited partnership allows a group of people, whether family, friends, or business partners, to pool their assets together in order to form a business. The good news is that with a decent accountant and lawyer, the process of forming a limited liability company can be pretty easy. Natalie Faye/Getty Images

If you find yourself wanting to pool your money with family members, friends, or other investors after reading about the benefits of limited partnerships in Limited Partnerships 101, you might be wondering about the actual process of forming a limited partnership.  This is especially true if you are interested in the estate tax and gift tax benefits.

The good news?  With the right accountant and attorney, limited partnership formation requires only a few hours of work, and the majority of it can be done for a few hundred or thousand dollars depending upon your needs, complexity, and vision.

 

Two Ways of Forming a Limited Partnership

Although there are several different ways to form a limited partnership, the two most common and advisable are:

  1. Use the services of a well-respected, qualified attorney. He or she can help you file the paperwork, choose which state is most advantageous for you to domicile your limited partnership, and write an operating agreement. In addition, for a fee, many attorneys will act as the person of record so that official notices from the government will be received promptly and help you retain some degree of anonymity, the extent of which will depend upon the specific details of your situation. 
  2. Use the services of a well-respected online legal provider, such as LegalZoom, which sells pre-packaged limited partnership services that are priced according to your needs. These types of methods are often far less expensive than using a local attorney but more difficult to custom tailor to your unique situation, which can become extreme expensive later if a conflict or challenge arises. However, if a cookie-cutter limited partnership agreement will serve your purposes, this is the most cost-effective method and you can do virtually everything necessary online in under an hour.

    Alternatively, if you are familiar with starting limited partnerships yourself, you can likely go to your Secretary of State office, submit any necessary paperwork, and establish the firm on your own for little more than the filing and processing fees.  Only experts or professionals who understand what they're doing should consider this.

    An Important Consideration for New Limited Partnerships

    One warning, though: Be very careful that you do not sell limited partnership interests to outside investors without first consulting with an attorney because these are often regarded as securities. There are strict rules and criminal laws that require compliance. It would be a disaster if you were to run afoul of them, potentially even if your mistake were innocent in nature.

    Once You've Formed a Limited Partnership, There Is Still Much To Be Done

    After you receive your certificate of limited partnership from the Secretary of State in the state in which you have opted to have your newly established business incorporated, and you've signed the limited partnership agreement, you can apply to the IRS for a Tax Identification Number (TIN) or Employer Identification Number (EIN), which is like a Social Security Number for businesses.  Using it, you can open a bank account, establish a brokerage account, acquire real estate, take out commercial loans, and all other economic activity one would expect of a real operating enterprise. 

    Any remaining steps after you've formed your limited partnership will depend upon the specifics of your business.

     If you are starting a registered investment advisor, you'll have certain regulatory requirements that must be met.  If you are opening a restaurant or bar, you'll need certain licenses and pass certain health inspections.  If you are planning a retail store, you'll need a state sales tax number and county and/or city business license.  

    More Information About Limited Partnerships

    For more information about limited partnerships, read the New Investor's Guide to Limited Partnerships.  You might also want to consider a legal form that many attorneys, accountants, entrepreneurs, and executives believe to be superior in its flexibility, which is the limited liability company.