Advantages and Disadvantages of Limited Partnership
Limited Partnerships go head-to-head with General Partnerships as business owners can get equal benefits from both. There are at least two partners involved in the business under a limited partnership. There can be several advantages and disadvantages of Limited Partnership in terms of profits, shares, liabilities, Taxes, assets, etc. Every business involves certain risks and advantages. Therefore, it’s always a considerable thought to go through Limited Partnership Pros and cons before you embark on your business partnership.
What are the Advantage of Limited Partnership?
There are different advantages of a Limited Partnership for a Corporation, including allowances for an unlimited number of shareholders. Tax benefits are most often counted as the benefits of limited Partnership.
1. Simple to form
A Limited Partnership is easy to form as compared to other business entities. The cost of application processing and fees are relatively lower in the limited partnership.
Also, the flexibility allows the partners to create centralized management structures like a corporation would be or not centralized at all, where managing partners each have an equal stake in what needs to happen. This flexibility allows partners to share resources, limit their personal liabilities, and increase their profits.
2. Limited Liability- is one of the advantages of Limited Partnership
The partners don’t have to face high levels of liability losses in a limited partnership. One of the leading advantages of limited partnership business is that limited partners are not personally liable for the debts in the business.
Partners are protected by the limited liability clauses against the creditors as specified by the law today. The creditors can only pursue a limited partner for the amount invested in the business.
3. Shared Responsibility
With partnership, partners are also bound to share the work responsibilities besides profits and investment. Different partners are likely to bring innovative business ideas to the dance to increase productivity. The workload can be split among partners as per their skills and area of expertise hence reducing the workload of each partner.
Also, the partners equally administer the decision-making process for the company. This ability also reduces space for arguments as the decisions taken are closely considered by the partners before concluding.
4. Tax Benefits
In a Limited Partnership (LP), partners can fill personal income taxes for the undertaken business. The partnership itself is not liable to pay any taxes on businesses that are generally higher. The credits and deductions are divided by the percentage of each partner’s share in the company.
Only then, the credits and deductions of the company are passed through to partners in the form of personal taxes to be paid. The tax deductions on other business entities such as C Corporation and Limited Liability Company are typically higher.
5. Scalable Growth
Many believe that a Limited Partnership isn’t as successful as a Publically Traded Company since partners can’t make huge profits through this form of business. Given that the general partner holds a greater role, and so are his responsibilities to fulfil. The business structure can be adjusted to reap profits so that whenever a company wants to grow, it can shift to the new approach. .
What are the Disadvantages of Limited Partnership?
No business structure is away from risks and disadvantages. This form of business structure is helpful for General partners; there are other concerning disadvantages of Limited Partnership that the other partners may face.
1. Profits are treated as personal income
Just like taxes, profit generated in this business structure are treated as an individual’s personal income. A partner in LP business structure is taxed on their personal income returns at the end of the financial year. This infers that the taxes are considered to be pass-through and the tax for self-employment in addition to regular income taxes can add up further.
2. General Partners has Maximum Risks
Since General Partner holds more rights to take decisive actions in a limited partnership, he is also accountable for the partnership's debts. Therefore, if the business goes bankrupt or is sued, general partners bear maximum risks. That's why there are more disadvantages of the limited partnership for General Partners than anyone.
Provided there are more personal risks involved due to personal liability and profits, the same can be counter-productive for a General partner in case of a business failure.
3. Limited partners have less to say
The general partner has more control to make all the business decisions in a Limited Partnership. As a Limited Partner, this means that you cannot have much control of your business. For a limited partner to avoid liability, they can’t be too involved in the business and hence have less contribution to make in decisions. This can be one of the primary disadvantages of a limited partnership. Rather than working with limited partners, general partners may require employees or freelancers for assistance.
4. Breach in Agreement
Since much of the decision-making power is held by the General Partner, there may be a moment of disagreement between them and their limited partner. Every individual’s opinion matters in a business, and disagreement between the partners can lead to disputes.
If such disagreements keep building and take a serious shape, it could breach the agreement. Such situations can put the entire business process at risk. In the worst-case scenario, it might even dissolve the business altogether.
5. Legal Responsibility- One of the common Disadvantages of Limited Partnership
Every partnership has some legal work to perform and comply with before and during the conduct of business. Partners are legally responsible for the actions they take. This disadvantage could negatively impact one partner if the other partner engages in unethical or illegal activities such as insider trading, tax fraud, or abuse of power. Any incident may taint the image of the business turning into a serious disadvantage of Limited Partnership.
Advantages and Disadvantages of Limited Partnership-Conclusion:
Considering several aspects of this business structure, there are many Advantages and Disadvantages of the Limited Partnership. For a business utilizing Labor-capital, this business structure is an ideal organizational structure. On the contrary, it’s not suitable for long-term businesses, suggest experts.