Limited Partnership (LP)
A limited partnership (LP) is a business structure with two types of partners: one or more general partners, who manage the business and bear personal liability for its debts, and one or more limited partners, who typically contribute capital but don't participate in day-to-day management and whose liability is limited to their investment. Unlike a general partnership, an LP requires a formal filing with the state to create. This structure is often used when some owners want to be actively involved in running the business while others want to invest without taking on management responsibilities or personal liability.
Ownership and Control
A Kentucky LP must have at least one general partner and at least one limited partner. General partners run the business and make management decisions; limited partners are generally more passive investors who don't participate in day-to-day control of the business.
Liability Protection
Liability protection in an LP depends on the partner's role. General partners have unlimited personal liability for the partnership's debts and obligations, just like in a general partnership. Limited partners, by contrast, are typically only at risk for the amount they've invested in the business, so long as they don't take an active role in managing it.
Taxation Method
Like a general partnership, an LP is a pass-through entity for tax purposes. The partnership files an informational tax return, but profits and losses pass through to the partners, who report their share on their personal tax returns.
Management Structure
General partners manage the business and have authority to bind the partnership in agreements and decisions. Limited partners generally do not participate in management; taking too active a role in running the business can risk a limited partner losing their limited liability protection.
Ease of Raising Capital
LPs are often used specifically to raise capital from investors who want to contribute funds without taking on management duties or personal liability, making this structure somewhat more attractive to passive investors than a general partnership. However, LPs cannot issue stock the way a corporation can, so capital-raising options are still more limited than for a C-Corp.
Ease of Formation
To form a Limited Partnership in Kentucky:
Choose a business name. Your LP's name must be distinguishable from other registered business names in Kentucky and must include an identifier such as "Limited Partnership" or "L.P." Learn more about business names.
Appoint a registered agent. Every Kentucky LP must designate a registered agent with a physical street address in the state to receive legal and official correspondence. Learn more about Registered Agents.
File a Certificate of Limited Partnership. This document is filed with the Kentucky Secretary of State, along with the required filing fee, and officially creates the LP. It typically identifies the general partner(s). The Kentucky Secretary of State website provides a lot of resources, incuding forms and guidance, for filing the Certificate of Limited Partnership.
Create a partnership agreement. While not always required to be filed with the state, a written partnership agreement can be beeficial. It can spell out each partner's role, contributions, profit and loss allocation, and the rights and responsibilities of general versus limited partners.
Obtain an EIN. Apply for a free Employer Identification Number from the IRS, which the partnership will need for tax filings and to open a business bank account. Learn more about EINs.
Register for state and local taxes/licenses. Depending on the business's activities and location, the partnership may need to register with the Kentucky Department of Revenue and obtain local occupational licenses or industry-specific permits. Learn more about taxes and licenses.
Ongoing Compliance
Kentucky LPs must file an annual report with the Secretary of State and pay associated fees, similar to LLCs and corporations. General partners should also maintain accurate records distinguishing the roles and contributions of general versus limited partners to help preserve limited partners' liability protection.