A New Investor's Guide to Limited Partnerships

What is the difference between buying shares of stock and putting your money into a limited partnership (LP)? If you're new to the market, this question may not be easy for your to answer.  At first glance, it's clear that the tax concerns, along with the pros and cons, are worth taking a close look at.

From buying LP units through a stock exchange and your brokerage account to forming your own LP so you can invest with family and friends by pooling money, this basic look at LPs aims to help answer your most pressing questions and guide you in the right direction. As a result, when you meet with an adviser, you'll have a starting point and a novice level of knowledge.

What Is a Family Limited Partnership?

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Family members often want to invest together by pooling their money to make the best choices for investing large sums of money that may not work for small account sizes.  One of the more common ways to achieve this is to form a family LP. 

This special type of investment provides tax pluses and a host of other features. As with other plans to invest money, LPs have cons of which you should be aware. This look gives you some basic knowledge of what a family LP is and how it may help your family build wealth into the future.

Using Family Limited Partnership to Lower Gift and Estate Taxes

A great way to lower estate taxes and gift taxes is to form a family LP, combine your assets within it, and then give part of the proceeds away to your heirs each year. This plan is often seen used by wealthy families who know how to build wealth. Learn more about it can work for you and your family.

Learn How to Form a Limited Partnership

If you know what LPs are, how they work, their pros and cons, and how they can serve you and your money, and you're ready to create one of your own, you must first decide where to start. Where should you go first, and what should be the first thing you do? It may be hard to see how it all fits at first, but starting an LP is much easier than you may think.

With the right lawyer or CPA and a few hundred or thousand dollars, you may be able to form your LP in an hour or two. If you're thinking about forming your own LP, here are two of the most common ways to form an LP in the U.S.

Reasons to Form a Limited Partnership

By now you should have basic knowledge of what an LP is, what it does, and a handful of its pros and cons. To expand upon what you've learned, this list spells out six major features of forming an LP. By knowing what they are, you can better make the most of putting your money in one.

Pros and Cons of Limited Liability Limited Partnerships

One of the biggest problems of using an LP is that the person in charge of the investments, the general partner, has unlimited liability.  That means if they take on too much debt and things go bad, he or she is on the hook and could have all of their own assets on the line.  

A large number of states have created a special type of investment plan known as a limited liability limited partnership (LLLP) to avoid this problem. Learn what an LLLP is and how it is used, along with its pros and cons.

Investing in Master LPs

Did you know that you may have put money into in LP units and not shares of stock without even knowing it? At times, these LP units trade on the open market and are often mistaken for shares of common stock.

When you log into your trade account to place a trade order, or when you call your broker with instructions to buy them, you or your broker may buy LP units instead of shares of the common stock. The tax outcome for such a mistake could be huge. 

What Is a Hedge Fund?

A hedge fund is a way to pool money to turbocharge your earnings. Almost all hedge funds and private equity funds are set up as LPs. Because of their precise rules and methods, only accredited and sophisticated investors can invest in a hedge fund. Also, because of this, only people with a high level of wealth are able to put their money in a hedge fund. People who own hedge funds are often chosen by the hedge fund managers.

If you have ever wanted to learn what a hedge fund is, what it does, how it earned its name, how its managers are paid, what type of investors are asked to buy in, and more, this brief glimpse will help you build your market savvy.