If you have read about the benefits of limited partnerships, including estate tax and gift tax benefits, you might be wondering about the actual process of forming a limited partnership with family members, friends, or other investors.
The good news is that it isn't extremely difficult to establish one of these entities. With the right accountant and attorney, limited partnership formation requires only a few hours of work. The majority of it can be done for a $1,000 or less—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, there are two common ways to achieve this goal:
- Use the services of a well-respected, qualified attorney. They can help you file the paperwork, choose which state is most advantageous for you to domicile your limited partnership, and write an operating agreement. Attorneys may also act as the person of record, for a fee. This helps ensure that official notices from the government will be received promptly, and it also helps you retain some degree of anonymity. The extent of anonymity will depend upon the specifics of your situation.
- 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 methods are often far less expensive than using a local attorney. As a trade-off for the relative inexpensiveness, you may find that it's more difficult to custom tailor the services to your situation, which can become expensive if a conflict or challenge later arises. However, if a cookie-cutter limited partnership agreement will serve your purposes, this is the most cost-effective method, and you can complete the bulk of the process online in under an hour.
Alternatively, if you are familiar with starting limited partnerships yourself, you can likely go to your secretary of state's 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
Be careful that you do not sell limited partnership interests to outside investors without first consulting with an attorney. Those partnership interests are often regarded as securities. There are strict rules and laws concerning securities, and you will be expected to comply with them. It could be disastrous to run afoul of these laws, even if your mistake was 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 and 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. You will need this number to open a bank account, establish a brokerage account, acquire real estate, take out commercial loans, and any other economic activities one would expect of a company.
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 to obtain certain licenses and pass certain health inspections. If you are planning a retail store, you'll need a state sales tax number and a county 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 business structure that many attorneys, accountants, entrepreneurs, and executives believe to be superior in its flexibility, which is the limited liability company.