What is the Role of a Limited Partnership Agreement?

For entrepreneurs and investors alike, limited partnerships (LPs) are a popular choice of business structure due to their many benefits. The limited partnership agreement is the foundational legal document for any LP. This Agreement shall govern the formation, organization, and operation of the LP and shall define the rights and obligations of each partner.

Each partner in a limited partnership (LP) should have their rights and responsibilities listed in an LP agreement. This agreement lays the groundwork for the partnership’s operations and sets standards for decision-making, profit divisions, and solving disagreements. A limited partnership agreement is required for the following reasons:

1. By setting forth the respective responsibilities of each partner, it helps to prevent any confusion or disagreements in the future.
2. The agreement creates a structure where limited partners’ financial exposure is capped at the amount of their capital contributions.
3. The partnership’s terms and conditions can be modified to suit the individual needs and objectives of each partner.
4. It specifies the legal requirements and formalities that must be met, like registration and filing requirements, to ensure compliance with laws and regulations.
5. Any limited partnership needs a well-drafted limited partnership agreement to ensure legal clarity, protection from liability, adaptability, and compliance with applicable laws.

Which Terms Should Be Included in a Partnership Agreement?

The rights and duties of each partner are laid out in detail in a limited partnership agreement. A comprehensive partnership agreement should include the following provisions, though the precise wording may vary depending on the type of partnership and the partners involved:

1. Roles and Responsibilities — The agreement needs to spell out the general partner’s duties and responsibilities, as well as their decision-making authority on the partnership’s behalf.
2. Rights and Obligations of Limited Partners — The agreement must define the limited partners’ rights and duties precisely. Their capital contributions, profit distribution, voting rights, and the transferability of their partnership interests may all be governed by these provisions.
3. Capital Contributions — The agreement should detail the initial and any future capital contributions that will be expected from each partner and the timing of those contributions. Failure to make timely capital contributions may result in dilution of ownership or forfeiture of partnership interests, both of which should be spelled out.
4. Profit and Loss Sharing — The allocation of profits and losses among the partners should be spelled out in the agreement. There may be special provisions for certain partners regarding their preferred returns or priority distributions, as well as provisions for the distribution of profits and the handling of losses.
5. Management and Decision-Making — How the partnership will be managed and decisions will be made should be laid out in the agreement. Limitations or restrictions on certain actions or transactions, as well as the general partner’s authority to make such decisions, and the rights and responsibilities of limited partners in the decision-making process, may be included in such provisions.
6. Dispute Resolution — Partners should be able to resolve disagreements through the dispute resolution mechanisms outlined in the agreement, such as arbitration or mediation. Provisions for the removal or replacement of a general partner in the event of disagreement or misconduct may also be included.
7. Term and Termination — The duration of the partnership should be laid out in the agreement, from its inception to its final dissolution. It should also specify how and under what conditions the partnership can be dissolved, such as with the consent of a majority of the partners or upon the happening of a certain event.
8. Distribution of Assets — Priority of distribution, as well as any preferential rights or restrictions that may apply to certain partners, should all be spelled out in the agreement and followed in the event of the partnership’s termination or dissolution.
9. Confidentiality and Non-Competition Provisions — Partners may be barred from using the partnership’s confidential information for their gain or competing with the partnership during or after the partnership’s term if the agreement restricts it.
10. Amendment and Governing Law — The agreement should outline the steps to be taken to amend the agreement, including whether or not unanimous consent from the partners is needed. The law that will be used to interpret and enforce the agreement should also be stated.

How to frame a limited partnership agreement?

To have a good idea on how to outline a limited partnership agreement, it’s important to understand each partner’s needs and objectives before preparing a draft agreement. The desired organizational structure, profit distribution, decision-making procedures, and exit options may all factor in. The agreement will more accurately reflect the intentions and expectations of all parties if there is open communication between them.

It is highly recommended that you seek professional assistance when drafting a limited partnership agreement due to the complexity of partnership law. Consultation with an accomplished business attorney or other professionals versed in partnership law is strongly suggested. They can help ensure the agreement is binding and complete from a legal standpoint.

Get Your Limited Partnership Taxes Filed Accurately with Eqvista

The general partners are responsible for self-employment taxes on their distributive share of the partnership’s income, while limited partners are only taxed on their ownership interest in the business. This tax treatment has the potential for tax savings and greater flexibility, but only if properly planned and executed following all applicable tax laws and regulations. To ensure the limited partnership is structured and operated tax-efficiently and that all reporting and payment requirements are met, it is crucial to consult with a tax professional or accountant. To help partners minimize tax liability and maximize financial outcomes, it is important to understand the tax implications of a limited partnership. Contact our professionals if you need help.