No, limited partnerships are not incorporated. A limited partnership is formed through registration, not incorporation, and exists as a distinct business entity separate from both sole proprietorships and corporations.
The confusion stems from a critical requirement: both LPs and corporations must file formation documents with the state. However, the Revised Uniform Limited Partnership Act of 2001 mandates that limited partnerships file a Certificate of Limited Partnership rather than Articles of Incorporation. This procedural difference creates immediate legal consequences, including different governance structures, tax treatment under Subchapter K of the Internal Revenue Code, and distinct liability protections for partners versus shareholders.
According to data from the National Association of Secretaries of State, over 2.3 million limited partnerships operate in the United States, yet nearly 40% of new business owners incorrectly assume that filing state formation documents means their partnership is “incorporated.”
Here’s what you’ll learn in this article:
📋 The exact legal distinctions between limited partnerships and corporations, including formation requirements, governing statutes, and structural differences that affect your daily operations
⚖️ How liability protection works in LPs versus corporations, with specific scenarios showing when general partners face personal exposure and when they don’t
💰 Tax treatment differences under federal law that determine whether you pay taxes once or twice, and how state laws create additional variations
📝 Step-by-step formation processes for both entity types, covering every line item on required forms and the consequences of each choice you make
🚫 The 7 most common mistakes business owners make when confusing LPs with corporations, plus the specific negative outcomes each error creates
What Is a Limited Partnership?
A limited partnership consists of at least one general partner who manages the business and assumes unlimited personal liability, plus one or more limited partners who contribute capital but cannot participate in management without losing their liability protection. The Uniform Limited Partnership Act, adopted in 46 states, establishes this fundamental structure.
General partners in an LP face the same unlimited liability as sole proprietors. If the partnership cannot pay its debts, creditors can pursue the general partner’s personal assets, including their home, savings, and other property. This exposure exists because general partners control business operations and make binding decisions.
Limited partners receive liability protection similar to corporate shareholders. Their potential losses cannot exceed their capital contribution to the partnership. For example, if Maria invests $50,000 as a limited partner in Riverside Properties LP, she cannot lose more than her $50,000 investment, even if the partnership accumulates $500,000 in debts.
This protection disappears if limited partners engage in management activities. Under Section 303 of the Uniform Limited Partnership Act, a limited partner who “participates in the control of the business” becomes liable to persons who reasonably believe they are general partners. Courts in Pennsylvania, Texas, and Florida have stripped limited partners of liability protection when they participated in hiring decisions, negotiated contracts, or made operational choices.
What Does Incorporation Mean?
Incorporation creates a legal entity through filing Articles of Incorporation with the state. This process brings a corporation into existence as a separate legal person under state corporate law statutes. The entity can own property, enter contracts, sue and be sued in its own name, completely separate from its shareholders.
The corporate form provides comprehensive liability protection for all owners. Shareholders, directors, and officers face no personal liability for corporate debts or obligations, assuming they maintain proper corporate formalities. This protection extends to everyone involved in the corporation, unlike limited partnerships where general partners remain personally exposed.
State corporation statutes, modeled after the Delaware General Corporation Law in many jurisdictions, mandate specific governance structures. Every corporation must have shareholders who own the company, a board of directors who set policy and make major decisions, and officers who handle daily operations. This three-tier structure cannot be altered, though one person can fill multiple roles in small corporations.
Corporations operate under different tax rules than partnerships. The Internal Revenue Service treats corporations as separate taxable entities under Subchapter C, meaning the corporation pays income tax on profits. When shareholders receive dividends, they pay personal income tax on that distribution. This double taxation represents a fundamental difference from partnership taxation.
Some corporations elect S corporation status under Subchapter S of the Internal Revenue Code. This election allows pass-through taxation similar to partnerships, but strict requirements limit eligibility. The corporation cannot have more than 100 shareholders, cannot have corporate or partnership shareholders, and can only issue one class of stock.
The Core Legal Distinction
Limited partnerships register under state partnership statutes, while corporations incorporate under state corporation statutes. This distinction determines every aspect of how the entity operates, from formation procedures to dissolution requirements.
The Certificate of Limited Partnership required for LP formation differs substantially from Articles of Incorporation. A Certificate of Limited Partnership must identify all general partners by name, specify the partnership’s purpose, list the registered agent, and include the business address. Some states require additional disclosures about limited partners or capital contributions.
Articles of Incorporation contain different mandatory information. They must specify the corporate name with a required designator like “Inc.” or “Corporation,” state the number of authorized shares, identify the registered agent, and list the incorporator. Delaware requires only this basic information, while California mandates additional details about stock classes and director liability limitations.
The filing creates different default governance rules. Under the Revised Uniform Limited Partnership Act, general partners hold exclusive management authority unless the partnership agreement provides otherwise. Limited partners have no voting rights or management power in the default structure. Partnership agreements can modify these rules, but any management participation by limited partners risks their liability protection.
Corporate governance follows rigid statutory requirements. State corporation codes mandate that shareholders elect directors, directors appoint officers, and officers manage daily operations. Even closely held corporations cannot completely eliminate this structure, though some states allow shareholder agreements that modify certain governance provisions.
Formation Process: Limited Partnership vs Corporation
Creating a Limited Partnership
The formation process begins when general partners draft a partnership agreement. This document governs the relationship between partners, establishes management authority, determines profit distribution, and sets procedures for admitting new partners or handling partner withdrawals. No statute requires this agreement, but operating without one creates significant risks.
General partners must file a Certificate of Limited Partnership with the Secretary of State or similar agency in the state where the business operates. The filing fee ranges from $70 in Arkansas to $1,000 in Massachusetts. The certificate becomes effective upon filing, immediately creating the limited partnership as a legal entity.
The certificate must include specific mandatory information:
Name Requirements: The partnership name must contain the words “Limited Partnership,” “L.P.,” or “LP.” This designation alerts third parties that limited partners exist who lack authority to bind the partnership. Using “Inc.” or “Corporation” in an LP name violates state naming statutes and creates potential fraud liability.
Registered Agent: Every LP must designate a registered agent with a physical address in the state. This person or entity receives legal documents, tax notices, and official correspondence. The agent must maintain regular business hours and cannot use a P.O. box address.
General Partner Information: The certificate must list each general partner’s full legal name and address. When a corporation or LLC serves as general partner, the filing must identify that entity by its exact legal name.
Principal Office: The LP’s main business address must appear on the certificate, even if it differs from the registered agent’s address.
Some states impose additional requirements. California mandates that limited partnerships file Form LP-1 and pay $70. New York requires publication of the LP formation in two newspapers for six consecutive weeks, adding $1,000 to $2,000 in costs. Texas demands detailed information about all partners and requires Form 701.
After filing, general partners must obtain an Employer Identification Number from the Internal Revenue Service. This nine-digit number identifies the partnership for tax purposes. The IRS requires Form SS-4 submission, which can be completed online, by mail, or by fax.
Limited partnerships must comply with annual reporting requirements. Most states mandate filing an annual report that updates partner information, confirms the registered agent, and verifies the business address. Annual report fees range from $25 in Oklahoma to $800 in Massachusetts. Missing the deadline triggers late fees, and continued noncompliance leads to administrative dissolution.
Creating a Corporation
Corporate formation requires more extensive documentation and stricter compliance procedures. The process begins with drafting Articles of Incorporation, also called a Certificate of Incorporation in Delaware and some other states.
Articles of Incorporation must contain these mandatory elements:
Corporate Name: The name must include “Corporation,” “Incorporated,” “Company,” “Limited,” or an abbreviation like “Corp.,” “Inc.,” “Co.,” or “Ltd.” The name cannot be identical or confusingly similar to existing corporations registered in that state. Secretary of State offices maintain searchable databases to check name availability.
Authorized Shares: The articles must state the total number of shares the corporation is authorized to issue. Delaware allows corporations to authorize shares without assigning par value, while some states require a minimum par value. The number of authorized shares affects state filing fees in several jurisdictions.
Stock Classes: If the corporation will issue multiple classes of stock with different voting rights or dividend preferences, the articles must describe each class. Preferred stock provisions require detailed specifications about liquidation preferences, conversion rights, and redemption terms.
Registered Agent: Like LPs, corporations must designate a registered agent with a physical address in the state. Commercial registered agent services charge $100 to $300 annually to fulfill this role.
Incorporator: At least one incorporator must sign the articles. The incorporator can be anyone, including an attorney or paralegal. Their role ends after filing, and they need not become shareholders, directors, or officers.
Filing fees for Articles of Incorporation vary significantly. Delaware charges $89 for standard processing, while Massachusetts charges $275. Nevada imposes fees based on authorized shares, potentially reaching thousands of dollars for corporations authorizing millions of shares.
After the state approves the articles, the incorporator holds an organizational meeting. This meeting accomplishes several critical tasks: adopting bylaws, appointing directors if they were not named in the articles, authorizing the issuance of stock, and appointing officers.
Bylaws govern the corporation’s internal operations. These rules specify how directors are elected, when annual meetings occur, what constitutes a quorum for voting, how officers are appointed and removed, and what authority officers possess. Unlike partnership agreements, bylaws cannot override mandatory statutory provisions in state corporation codes.
The corporation must issue stock certificates or maintain electronic records documenting each shareholder’s ownership. Proper stock issuance requires that shares are issued for adequate consideration, which can include cash, property, or services. Issuing shares for promissory notes or future services creates potential liability for directors who approve the issuance.
Corporations face ongoing compliance requirements exceeding those for limited partnerships. Annual shareholder meetings must occur, even in single-shareholder corporations. Directors must hold regular board meetings and maintain minutes documenting all significant decisions. The corporation must file annual reports with the state, and many states require separate tax returns even when the corporation elects pass-through taxation.
Liability Protection Differences
General Partner Exposure in Limited Partnerships
General partners in an LP face unlimited personal liability identical to sole proprietors. This exposure cannot be eliminated through the partnership agreement or operating procedures. When the partnership incurs debts, faces lawsuits, or defaults on obligations, creditors can pursue the general partner’s personal assets.
Consider this scenario: David serves as general partner of Mountain Equipment LP, which sells outdoor gear. The partnership orders $200,000 in inventory from suppliers. When unexpected competition forces store closures, Mountain Equipment LP cannot pay its suppliers. The suppliers obtain a judgment against the partnership for $200,000 plus interest and legal fees.
The partnership owns only $50,000 in remaining inventory and equipment. Creditors can force the sale of these assets, but a $150,000 deficiency remains. The suppliers then pursue David personally. They can place liens on his home, garnish his wages from other employment, seize his personal bank accounts, and claim other personal property. David’s personal net worth becomes available to satisfy the partnership’s debts.
This unlimited liability extends to obligations created by other general partners. If Mountain Equipment LP has two general partners, and David’s co-partner signs a lease committing the partnership to $300,000 in rent obligations, David becomes personally liable for that obligation even though he never signed the lease. General partners share joint and several liability for all partnership obligations.
Courts have extended this liability beyond contract debts. In negligence cases, injured parties can pursue general partners personally for torts committed by partnership employees. A customer who slips and falls in a partnership-owned store can sue both the partnership and the general partners individually. Professional malpractice claims against law, accounting, or medical partnerships typically name general partners as defendants alongside the partnership entity.
Limited Partner Protection and Risks
Limited partners enjoy liability protection resembling corporate shareholders. Their maximum exposure equals their capital contribution plus any unpaid contribution they promised to make. Once they fully pay their agreed contribution, no additional personal liability exists for partnership debts or obligations.
This protection contains critical exceptions. Section 303 of the Uniform Limited Partnership Act destroys limited liability when limited partners “participate in control” of the business. The statute provides a safe harbor list of activities that do not constitute control, including:
- Consulting with and advising general partners
- Acting as a contractor or agent for the partnership
- Attending partnership meetings
- Voting on fundamental matters like dissolution or sale of substantially all assets
- Reviewing financial information and partnership records
Activities that exceed these safe harbors risk personal liability. Courts have found control participation when limited partners:
Make hiring and firing decisions: In Gateway Potato Sales v. G.B. Investment Co., an Idaho court held that a limited partner who participated in employee termination decisions exercised control and lost liability protection.
Negotiate contracts: Texas courts stripped liability protection from a limited partner who negotiated lease terms and signed contracts as a partnership representative.
Direct daily operations: When a limited partner instructs employees about operational matters or makes management decisions without general partner approval, courts treat them as general partners.
Hold themselves out as general partners: A limited partner who allows vendors, customers, or lenders to believe they are a general partner becomes liable to those parties who rely on that representation.
The control participation standard varies by state. Some jurisdictions apply a strict interpretation where any management involvement triggers liability. Others use a reasonable reliance test, imposing liability only when third parties reasonably believed the limited partner was a general partner based on their participation.
Corporate Shareholder Protection
Corporate shareholders receive comprehensive liability protection that extends to all owners regardless of their participation level. A shareholder who actively manages the corporation as an officer maintains the same liability shield as passive investors who merely own stock.
This protection operates through the corporate veil doctrine. The corporation exists as a separate legal person, and its obligations belong to that entity alone. Shareholders risk only their investment in the corporation. If Sarah buys 1,000 shares of TechStart Inc. for $10,000, her maximum loss is $10,000, even if TechStart accumulates millions in debts.
Courts pierce the corporate veil only in exceptional circumstances. Creditors must prove that shareholders used the corporate form to perpetrate fraud, ignored corporate formalities so thoroughly that no real separation existed between owner and entity, or undercapitalized the business to avoid paying creditors. The standard for piercing the veil is significantly higher than the standard for finding control participation by limited partners.
Corporate directors and officers also enjoy liability protection. The business judgment rule shields directors from personal liability for decisions made in good faith, with reasonable information, and with honest belief the decision served the corporation’s interests. Even decisions that prove disastrous do not create personal liability absent fraud, self-dealing, or gross negligence.
Tax Treatment: The Fundamental Difference
Partnership Tax Status for Limited Partnerships
Limited partnerships receive pass-through taxation under Subchapter K of the Internal Revenue Code. The partnership itself pays no federal income tax. Instead, each partner reports their share of partnership income, deductions, and credits on their personal tax return, regardless of whether the partnership distributed cash.
This treatment creates significant advantages. Partnership income is taxed only once at the partner level. If Mountain Equipment LP earns $300,000 in profit, that income flows through to the partners’ tax returns. They pay personal income tax at their individual rates, but the partnership pays no entity-level tax.
The IRS requires limited partnerships to file Form 1065 annually. This information return reports the partnership’s total income, expenses, and deductions. The form does not calculate tax owed because the partnership itself owes no tax. Instead, Form 1065 allocates income and deductions among partners.
Each partner receives Schedule K-1 showing their share of partnership items. This form breaks down ordinary business income, capital gains, dividends, interest income, charitable contributions, and other items. Partners use Schedule K-1 to complete their individual tax returns.
Partnership agreements determine how income and losses are allocated. General partners and limited partners can receive different allocation percentages. The partnership agreement might allocate 60% of profits to general partners and 40% to limited partners, or use complex formulas based on capital contributions, sweat equity, or performance metrics.
The IRS scrutinizes partnership allocations under Section 704(b) of the Internal Revenue Code. Allocations must have “substantial economic effect,” meaning they must reflect genuine economic arrangements rather than tax avoidance schemes. Special allocations that give one partner 90% of losses but only 10% of profits raise red flags and trigger IRS challenges.
Self-employment tax creates an additional burden for general partners. They must pay the 15.3% self-employment tax on their distributive share of partnership income. This tax covers Social Security and Medicare contributions. Limited partners generally avoid self-employment tax on their distributive shares because they do not actively participate in the business.
Corporate Tax Treatment
Corporations face double taxation under Subchapter C of the Internal Revenue Code. The corporation pays income tax on its profits at the corporate tax rate, currently 21% for federal purposes. When the corporation distributes after-tax profits to shareholders as dividends, shareholders pay personal income tax on those dividends.
This double taxation significantly increases the total tax burden. If TechStart Inc. earns $300,000 in profit, it pays $63,000 in federal corporate income tax. The remaining $237,000 becomes available for distribution. If TechStart pays all $237,000 as dividends to its shareholders, they pay personal income tax at qualified dividend rates of 0%, 15%, or 20% depending on their income level.
Assuming a 15% dividend rate, shareholders pay $35,550 in additional tax. Total tax on the $300,000 in profit reaches $98,550, representing a 32.85% effective rate compared to the single layer of taxation in a partnership structure.
Many corporations avoid dividend distributions to eliminate the second tax layer. Instead, they retain earnings within the corporation or compensate shareholder-employees with salaries. Reasonable compensation to shareholder-employees is tax-deductible for the corporation, reducing corporate taxable income while providing income to shareholders that’s taxed only once.
The IRS monitors this strategy closely. Section 162(a)(1) requires that compensation be reasonable for services actually rendered. Excessive compensation gets recharacterized as dividends, triggering the second tax layer. The IRS examines factors including compensation paid to non-shareholder employees in similar roles, the employee’s qualifications and duties, prevailing rates in the industry, and the corporation’s financial condition.
Some corporations elect S corporation status to achieve pass-through taxation. Filing Form 2553 with the IRS converts a C corporation to an S corporation. The election must be unanimous among shareholders and requires meeting strict eligibility requirements.
S corporations file Form 1120-S annually, similar to partnership Form 1065. Shareholders receive Schedule K-1 showing their share of corporate income and deductions. The income flows through to shareholders’ personal returns, avoiding entity-level taxation.
State Tax Variations
State tax treatment adds complexity beyond federal rules. Some states do not recognize S corporation elections, imposing corporate-level tax despite federal pass-through status. California charges S corporations a 1.5% franchise tax on income, plus an $800 minimum annual tax. New Hampshire and Tennessee impose taxes on corporate income even for S corporations, though Tennessee’s tax was phased out by 2021.
Limited partnerships face varying state tax treatment. Most states follow federal pass-through treatment, but some impose entity-level taxes. Texas charges LPs a franchise tax based on gross receipts, not income. New York City imposes an unincorporated business tax on partnership income earned within city limits.
Several states require partnerships to withhold income tax on behalf of nonresident partners. When a California LP has partners residing in other states, the partnership must withhold California income tax on the nonresident partners’ share of California-source income. This requirement creates administrative burdens and potential penalties for noncompliance.
Real-World Scenarios: When the Distinction Matters
Scenario 1: Asset Protection Planning
Jennifer and Marcus want to invest in rental properties. They have $500,000 to invest and plan to acquire three properties. Jennifer will manage the properties, handling tenant issues, maintenance, and financial decisions. Marcus will contribute capital but wants no involvement in management. They consult an attorney about whether to form a limited partnership or incorporate.
| Business Structure | Asset Protection Outcome |
|---|---|
| Jennifer forms an LLC and serves as general partner, Marcus becomes limited partner of an LP | Marcus achieves full liability protection limited to his $250,000 investment. Jennifer faces unlimited personal liability for all partnership obligations including tenant lawsuits, contractor disputes, and mortgage defaults. A $1 million lawsuit could force Jennifer into bankruptcy and destroy her personal assets. |
| Jennifer and Marcus form an LLC and serve as managing members | Both Jennifer and Marcus receive liability protection limited to their investments. The LLC’s debts and obligations cannot reach their personal assets absent fraud or inadequate capitalization. A $1 million lawsuit affects only the LLC’s assets. |
| Jennifer and Marcus incorporate and serve as officers/shareholders | Both receive comprehensive liability protection through the corporate veil. Neither faces personal exposure for corporate obligations. The corporation can elect S status to achieve pass-through taxation similar to partnerships. |
| Jennifer and Marcus form a general partnership | Both face unlimited personal liability as general partners. Any lawsuit or debt creates exposure for both partners’ personal assets. This structure provides no liability protection and creates maximum risk. |
The attorney recommends Jennifer form a separate LLC to serve as the general partner of the LP. This structure gives Marcus limited partner protection while shielding Jennifer’s personal assets through the LLC’s liability protection. The two-entity structure adds formation costs and administrative requirements but eliminates unlimited personal liability.
Scenario 2: Real Estate Development Project
Riverside Development wants to build a 200-unit apartment complex requiring $15 million in capital. The project needs three general partners with development expertise and 30 limited partners who will invest $400,000 each. The general partners will contribute $1 million total and handle all development decisions, construction management, and ongoing operations.
| Investor Type | Return and Risk Profile |
|---|---|
| General Partners investing $1 million total | Receive 30% of all profits despite contributing less than 7% of capital. Face unlimited personal liability for construction defects, contractor disputes, lender defaults, and tenant lawsuits. If the project fails and creates $5 million in losses, general partners must pay these obligations from personal funds. Their net worth becomes available to creditors. |
| Limited Partners investing $12 million total | Receive 70% of all profits proportional to their $400,000 investments. Maximum loss is limited to their $400,000 contribution. Cannot participate in development decisions or construction management. If they attend site meetings or approve contractor selections, they risk losing limited partner status and facing personal liability. |
The project encounters severe problems. Foundation issues require $2 million in unexpected repairs. A construction accident injures three workers who sue for $8 million. The project’s lender declares default when completion deadlines are missed, accelerating $12 million in loan obligations.
Limited partners lose their $400,000 investments when the partnership dissolves. General partners face personal liability for the entire $22 million in obligations after partnership assets are exhausted. The construction accident claims alone exceed partnership assets, and injured workers pursue the general partners personally. Two general partners file bankruptcy, losing their homes and personal savings.
This scenario demonstrates why sophisticated real estate partnerships use corporations or LLCs as general partners. If Riverside Development LLC served as the sole general partner, its owners would have liability protection while maintaining management control. The LLC would face the $22 million in obligations, but the individual owners would not face personal exposure.
Scenario 3: Family Business Succession
Thompson Manufacturing has operated for 40 years as a C corporation. The founder, Robert Thompson, wants to transfer ownership to his three children while retaining control during his lifetime. His attorney suggests converting to a limited partnership structure.
| Conversion Approach | Family Impact |
|---|---|
| Robert converts the corporation to an LP with himself as sole general partner | Robert maintains complete management control. His children receive limited partner interests representing 90% of partnership value. Robert’s estate avoids probate for the partnership interests transferred during his lifetime. However, Robert now faces unlimited personal liability he never had as a corporate shareholder. A product liability lawsuit could destroy his personal estate. |
| Robert retains the corporation and gifts shares to his children | Robert can structure different share classes to maintain voting control while transferring economic value. All family members retain liability protection. The corporation’s existing contracts, licenses, and relationships continue without disruption. Corporate structure accommodates easier future sale to outside buyers. |
| Robert creates a family limited partnership with a corporate general partner | The corporation becomes the 1% general partner, with Robert controlling the corporation. Family members own 99% as limited partners. This structure preserves liability protection while enabling the transfer of value. Robert controls the general partner entity, maintaining full management authority. |
Robert’s attorney explains that corporations provide superior liability protection for family businesses with significant operating risks. Product liability, employment disputes, and environmental claims could create devastating exposure for a general partner. The corporate form shields all family members regardless of their involvement level.
The attorney also notes that converting from a corporation to a partnership creates immediate tax consequences. The conversion triggers recognition of built-in gains on appreciated assets. If Thompson Manufacturing owns real estate, equipment, and inventory worth $5 million more than their tax basis, the conversion creates a $5 million taxable gain. At a 21% corporate rate plus state taxes, the conversion could cost over $1.2 million in immediate tax liability.
Formation Document Requirements: Line by Line
Certificate of Limited Partnership
Article 1 – Name of Limited Partnership: Enter the exact name including “Limited Partnership,” “L.P.,” or “LP.” The name cannot be identical to existing businesses registered with the state. Most Secretary of State websites offer name availability searches. Including geographic terms like city names is optional but helps distinguish the partnership. Trade names or “doing business as” names must be registered separately and do not appear on this certificate.
Choosing a name without checking availability creates rejection by the filing office. Some states allow name reservations for 60 to 120 days before filing, protecting the name while formation documents are prepared. Reservation fees range from $10 to $50.
Article 2 – Registered Agent: Provide the full legal name of the individual or commercial service serving as registered agent. The agent must maintain a physical street address in the state, not a P.O. box. The agent’s address becomes public record where the partnership receives legal documents and state correspondence.
Selecting an inappropriate agent causes formation delays. The agent must be available during business hours and must accept service of process. Using a personal address exposes that location to privacy concerns. Commercial registered agent services charge $100 to $300 annually and provide mail forwarding and compliance reminders.
Article 3 – Principal Office Address: Enter the complete street address where the partnership conducts business. This address can be located in any state, not just the state of formation. Partnerships often form in Delaware or Nevada for favorable laws while operating elsewhere.
Using a registered agent’s address as the principal office is permissible but creates confusion about the actual business location. The principal office address appears on tax returns, bank documents, and contracts. Post office boxes are not acceptable for this requirement.
Article 4 – General Partner Information: List each general partner’s full legal name and complete address. When an LLC or corporation serves as general partner, provide that entity’s exact legal name as registered with its formation state.
Omitting a general partner or listing incorrect names creates serious liability risks. Third parties rely on this public record to identify who has authority to bind the partnership. An individual not listed as a general partner may claim they have no liability for partnership obligations. Incomplete disclosures can constitute fraud if done intentionally to mislead creditors.
Article 5 – Effective Date: Most states make the LP effective upon filing unless a future date is specified. Some jurisdictions allow delayed effectiveness up to 90 days after filing. Selecting a delayed effective date coordinates the formation with other business events like lease commencements or acquisition closings.
Choosing the wrong effective date creates uncertainty about when the partnership legally exists. Contracts signed before the effective date may lack enforceability if signed in the partnership name. Partners should execute agreements individually or on behalf of a different entity until the LP becomes effective.
Article 6 – Latest Date of Dissolution: Some states require the partnership to specify a dissolution date, though most now allow perpetual existence. Delaware allows perpetual duration unless the certificate specifies otherwise. California requires LPs to state whether duration is perpetual or for a specific term.
Selecting a specific term creates mandatory dissolution unless partners amend the certificate before the date arrives. Perpetual duration provides flexibility but requires attention to succession planning. If general partners die or become incapacitated, the partnership agreement should address continuation or dissolution.
Article 7 – Additional Provisions: This optional section accommodates provisions required by the partnership agreement or desired for public notice. Partners can disclose limited partner rights to participate in certain decisions without triggering control participation. Provisions limiting general partner authority or requiring supermajority votes for specific actions can appear here.
Including provisions about limited partner management rights provides legal protection against control participation claims. If the certificate states that limited partners can approve major purchases without losing limited liability, courts will uphold that protection. Omitting these provisions leaves limited partners vulnerable when they exercise rights granted in the partnership agreement.
Articles of Incorporation
Article 1 – Corporate Name: Enter the exact corporate name including a required designator: “Corporation,” “Incorporated,” “Company,” “Limited,” or abbreviations “Corp.,” “Inc.,” “Co.,” or “Ltd.” The name must be distinguishable from all existing corporate names in the state database.
Names that imply governmental affiliation require special approval. Using terms like “FBI,” “Treasury,” or “State Department” typically results in rejection. Banking terms like “Bank,” “Trust,” or “Federal” require regulatory approval before use.
Professional corporations in many states must include the designation “Professional Corporation” or “P.C.” Choosing a standard corporate designation for a professional firm violates licensing board regulations and can result in disciplinary action against licensed professionals.
Article 2 – Registered Agent: Provide the registered agent’s full name and physical street address in the state of incorporation. The agent must agree to serve before being named. Most states require the agent to sign the articles or file a separate consent to serve as agent.
Failing to maintain a registered agent creates serious consequences. States administratively dissolve corporations that lack agents for extended periods. The dissolution terminates the corporation’s authority to conduct business and eliminates liability protection until the corporation is reinstated.
Article 3 – Authorized Shares: State the total number of shares the corporation is authorized to issue. This number does not represent issued shares or shareholder ownership. The corporation can issue fewer shares than authorized but cannot exceed this limit without amending the articles.
Delaware and many states do not require par value designations. Other states require each share to have a minimum par value, typically $0.01 per share. Selecting high par values creates potential liability for directors who issue shares below par value.
Authorized shares affect state fees in several jurisdictions. Texas bases franchise tax on authorized shares. Nevada charges fees based on authorized shares, with significant increases for corporations authorizing over one million shares. Authorizing excessive shares unnecessarily increases costs.
Article 4 – Classes of Stock: If the corporation will issue only common stock with identical rights, state “one class of common stock.” If multiple classes will exist, describe each class’s voting rights, dividend preferences, liquidation preferences, conversion rights, and redemption terms.
Preferred stock provisions require careful drafting. Liquidation preferences give preferred shareholders priority over common shareholders when the corporation dissolves. A 1x liquidation preference entitles preferred shareholders to receive their investment before common shareholders receive anything. A 2x preference gives them double their investment first.
Omitting important stock provisions creates disputes later. If articles authorize preferred stock without specifying dividend rights, courts may interpret that as mandatory cumulative dividends. Failing to address voting rights for preferred stock may give those shares full voting parity with common stock.
Article 5 – Incorporator: The incorporator must sign the articles. This person or entity can be anyone, including attorneys, paralegals, or corporate service companies. The incorporator’s role ends after filing unless they also become a director or officer.
Some states require listing directors in the articles. Delaware does not require this disclosure, allowing complete privacy for initial directors. California mandates listing at least one initial director by name and address.
Article 6 – Purpose: Most states allow a broad purpose statement like “to engage in any lawful business.” Specific purpose limitations are optional and restrict the corporation’s activities. Banking corporations must state a banking purpose. Professional corporations must specify the licensed profession.
Selecting an overly narrow purpose creates ultra vires concerns. Actions outside the stated purpose may be voidable, and directors could face liability for approving them. Modern corporation statutes minimize ultra vires doctrine impact, but specific purpose limitations still carry risks.
Article 7 – Duration: Nearly all corporations select perpetual duration. Some states allow specific term corporations that automatically dissolve on a stated date. Perpetual duration provides maximum flexibility for ongoing business operations.
The articles take effect when filed unless a delayed effective date is specified. Some states allow up to 90 days delayed effectiveness. Coordinating the effective date with other organizational steps ensures the corporation exists before opening bank accounts or signing contracts.
Mistakes to Avoid
Filing the Wrong Formation Document
Entrepreneurs sometimes file Articles of Incorporation believing they are creating a limited partnership, or file an LP certificate while intending to incorporate. This error stems from confusion about state filing requirements. Both documents go to the same government office and require similar information.
This mistake creates the wrong entity type with incorrect tax treatment, liability protections, and governance rules. A business that files Articles of Incorporation inadvertently creates a corporation subject to double taxation and rigid governance requirements. The business must dissolve the corporation and form the intended limited partnership, wasting filing fees and causing delays.
Some states reject filings that use incorrect forms. Others process the filing and create the entity type corresponding to the form submitted, regardless of what the business intended. Corrections require dissolution of the wrong entity, formation of the correct entity, and transfer of all assets, contracts, and licenses to the new entity.
Using Incorporation Language for Limited Partnerships
Business owners sometimes describe their limited partnership as “incorporated” when speaking to banks, vendors, or customers. This misrepresentation creates potential liability. Third parties who rely on statements that the business is incorporated may successfully pierce the partnership veil if they can show detrimental reliance on the misrepresentation.
The error also causes problems with contracts. A contract signed by “Johnson Properties, Inc.” when the actual entity name is “Johnson Properties, LP” may be unenforceable against the partnership. The general partner who signed using the wrong entity name could face personal liability for breach of contract because they contracted in their individual capacity rather than on behalf of the partnership.
Banks reject account applications when the formation documents do not match the stated entity type. An LP that describes itself as incorporated on banking documents will face requests for Articles of Incorporation. When the business cannot produce articles because they filed a limited partnership certificate instead, account opening stalls.
Limited Partners Participating in Management
Limited partners sometimes attend meetings, express opinions about business strategy, or review operational reports without understanding that excessive participation destroys their liability protection. Courts examine the totality of circumstances to determine whether participation constitutes control.
A limited partner who reviews financial statements quarterly and attends annual meetings maintains protection. A limited partner who joins weekly management meetings, approves hiring decisions, negotiates supplier contracts, and directs employees has crossed into control participation. Courts will treat that person as a general partner with unlimited personal liability.
The consequences become apparent when the partnership faces lawsuits or defaults. Creditors investigate limited partner involvement and argue that active participants should face personal liability. Even if 95% of limited partners had no involvement, the one who participated excessively faces individual exposure.
Failing to Maintain Separate Entity Status
Some general partners commingle personal and partnership funds, using partnership accounts to pay personal expenses or depositing personal income into partnership accounts. Others sign contracts in their personal name rather than designating their representative capacity.
These failures eliminate the distinction between partner and entity. Courts pierce the limited partnership veil when general partners treat partnership assets as their own. The liability protection for limited partners collapses when commingling becomes so extensive that no real separation exists.
Creditors use discovery to examine bank records, contracts, and correspondence. Evidence of commingling strengthens claims that the partnership is merely an alter ego of the general partners. Once the veil is pierced, all partners face personal liability regardless of their limited partner status.
Ignoring Annual Compliance Requirements
Limited partnerships must file annual reports in most states, listing current general partner information, registered agent details, and principal office addresses. Missing these filings triggers administrative dissolution after notice and cure period provisions expire.
Administrative dissolution terminates the partnership’s authority to conduct business. Contracts signed after dissolution may be unenforceable against the entity. The general partners become personally liable for obligations incurred after dissolution because they no longer operate as an authorized entity.
Reinstatement requires filing all overdue reports, paying accumulated fees and penalties, and paying a reinstatement fee. Some states charge $500 or more for reinstatement. During the dissolution period, the partnership cannot defend lawsuits in its own name or enforce its contracts.
Inadequate Partnership Agreement Terms
Operating a limited partnership without a comprehensive partnership agreement creates problems when disputes arise. State default rules may not reflect the partners’ intentions. Without an agreement specifying profit distribution, state law requires allocation according to capital contributions, which may not match expectations.
Partnership agreements should address admission of new partners, transfer of partnership interests, partner withdrawal, partner expulsion, deadlock resolution, and dissolution procedures. Absence of these provisions leaves partners without remedies when relationships deteriorate.
The most critical provisions govern general partner removal and limited partner management rights. Without clear removal procedures, general partners cannot be removed except through judicial action showing cause. Without defined management rights, limited partners face uncertainty about what activities constitute control participation.
Treating S Corporation Election as Automatic
Some business owners believe that incorporating automatically provides pass-through taxation. This misconception leads to surprise when the corporation files its first tax return and discovers it owes entity-level income tax. S corporation status requires affirmative election on Form 2553 with unanimous shareholder consent.
The election must be filed within specific timeframes. To be effective for the current tax year, Form 2553 must be filed by the 15th day of the third month of the tax year. Late elections become effective for the following year, subjecting the current year to C corporation double taxation.
Some corporations cannot elect S status due to eligibility restrictions. A corporation with 150 shareholders, corporate shareholders, nonresident alien shareholders, or multiple stock classes cannot elect S status. Discovering ineligibility after incorporation requires restructuring or accepting C corporation taxation.
Do’s and Don’ts for Limited Partnerships
Do’s
Do use a corporation or LLC as the general partner when asset protection is important. This structure eliminates unlimited personal liability while preserving limited partner protections. The entity serving as general partner faces exposure, but its owners maintain their liability shields. This approach is standard for real estate partnerships and family limited partnerships where general partners want management control without personal risk.
Do maintain detailed records distinguishing limited partner investments from management activities. Document all meetings, decisions, and communications to prove limited partners did not participate in control. Written minutes showing that general partners made all operational decisions provide evidence if creditors later claim limited partners exercised control. Regular financial reports to limited partners demonstrate proper information flow without management participation.
Do draft comprehensive partnership agreements addressing all potential dispute scenarios. Include provisions for partner withdrawal, deadlock resolution, general partner removal, transfer restrictions, valuation methods for partnership interests, and dissolution procedures. These terms prevent costly litigation when partner relationships deteriorate and provide mechanisms for resolving disputes without judicial intervention.
Do make required annual filings on time and maintain registered agent compliance. Calendar filing deadlines and submit reports early to avoid late fees and administrative dissolution. Update registered agent information immediately when agents resign or change addresses. Administrative dissolution destroys liability protection and creates personal exposure for general partners acting on behalf of a dissolved entity.
Do consult tax professionals about state-specific partnership tax obligations. Many states impose entity-level taxes on partnerships despite federal pass-through treatment. Understanding state filing requirements, estimated tax payments, and withholding obligations for nonresident partners prevents penalties and ensures compliance. Multistate partnerships face particularly complex obligations requiring professional guidance.
Don’ts
Don’t allow limited partners to participate in management decisions without documenting safe harbor protections. If limited partners will vote on specific matters, amend the certificate of limited partnership to explicitly authorize that participation. Without this documentation, voting or attending management meetings risks destroying their limited liability status. Courts apply the control participation test strictly when creditors seek to hold limited partners personally liable.
Don’t commingle personal and partnership funds or assets. Maintain separate bank accounts for the partnership and never use partnership accounts for personal expenses. Each check or electronic transfer should clearly indicate whether it relates to partnership business. Commingling provides evidence that the partnership is an alter ego of the general partners, making veil-piercing claims successful.
Don’t assume limited partnership structure provides optimal tax treatment without analysis. While pass-through taxation benefits most partners, self-employment tax on general partner income can exceed the tax cost of reasonable salary plus dividends in a corporate structure. Run comparative tax projections considering self-employment tax, qualified business income deductions, and state tax variations before selecting entity type.
Don’t describe your limited partnership as incorporated or use corporate designators. This misrepresentation can create liability when third parties rely on the incorrect status. Always use the exact legal name from the certificate of limited partnership including “LP” or “Limited Partnership” in all communications, contracts, and business correspondence.
Don’t transfer partnership interests without following partnership agreement procedures. Most agreements restrict transfers and require general partner approval. Violating transfer restrictions can void the transfer, trigger breach of contract claims, or cause involuntary dissolution. Even family transfers between spouses or to children typically require compliance with agreement terms and state securities law exemptions.
Pros and Cons Comparison
Limited Partnership Pros
Pass-through taxation eliminates double taxation and allows losses to flow through to partners’ tax returns. Partners can use partnership losses to offset other income on their personal returns, subject to passive activity loss limitations. This treatment provides significant value during startup years when businesses generate losses. The tax savings from loss deductions can effectively reduce the cost of capital for investors.
Flexible management structure allows expertise to control operations while passive investors provide capital. General partners make all business decisions without shareholder votes or board approvals. This efficiency speeds decision-making and allows businesses to respond quickly to opportunities. Limited partners receive returns on their investment without involvement in daily operations.
Partnership agreements can create custom economic arrangements not possible in corporate structures. Profits and losses can be allocated using formulas based on capital contributions, time invested, performance metrics, or any other objective criteria. Special allocations give certain partners preferred returns or disproportionate shares of specific income types. Waterfall distributions allow different returns at different investment stages.
Limited partners face no self-employment tax on their distributive shares of partnership income. This exemption saves 15.3% compared to active business income. For high-income limited partners, the savings can reach tens of thousands of dollars annually. Combined with pass-through taxation, LPs offer significant tax advantages for passive investors.
Formation costs and ongoing compliance requirements are lower than corporations. Most states charge less for LP certificates than for Articles of Incorporation. Annual reporting requirements are simpler, and many states do not require LPs to hold annual meetings or maintain detailed corporate minutes. The reduced administrative burden lowers professional fees and simplifies operations.
Limited Partnership Cons
General partners face unlimited personal liability creating extreme risk exposure. This vulnerability threatens general partners’ homes, savings, retirement accounts, and other personal assets. Even one general partner’s poor decision binds the partnership and creates liability for all general partners. This exposure makes traditional LP structures unsuitable for businesses with significant liability risks unless a corporate general partner is used.
Limited partners lose liability protection if they participate in management, creating uncertainty about permissible activities. The line between advisory consultation and control participation is subjective. Limited partners must constantly evaluate whether their involvement crosses into dangerous territory. This limitation prevents limited partners from protecting their investments through active monitoring.
Transfer restrictions in partnership agreements limit liquidity for partners wanting to exit. Most agreements require general partner approval for transfers and give existing partners first refusal rights. No public market exists for partnership interests. Selling interests requires finding buyers willing to accept limited partner status with no control. These restrictions can trap investors in underperforming partnerships.
Refinancing or selling partnership property may require all partners’ consent depending on agreement terms. Even ministerial actions like changing insurance carriers or switching banks might need signatures from dozens of limited partners. This administrative burden slows operations and creates practical difficulties as partnerships grow.
Self-employment tax on general partners’ distributive shares can exceed corporate tax costs in profitable partnerships. General partners pay 15.3% self-employment tax on their entire distributive share, even if the partnership distributes less cash than the allocated income. This tax applies to all partnership income allocated to general partners, creating higher total tax than the corporate alternative in some situations.
Corporation Pros
Complete liability protection for all shareholders, directors, and officers regardless of participation level. Shareholders who serve as CEO face the same protection as passive investors. This comprehensive shield protects personal assets from corporate debts, lawsuits, and obligations. The corporate veil can be pierced, but the standard is demanding and rarely satisfied absent fraud or complete disregard of corporate formalities.
Unlimited growth potential through stock issuance to any number of investors. Corporations can have thousands or millions of shareholders. Stock can be sold to venture capital firms, private equity investors, or the public through initial public offerings. This flexibility makes corporations the preferred vehicle for businesses seeking substantial capital or planning eventual public offerings.
Transferable ownership interests create liquidity for shareholders wanting to exit. Share transfers require no corporate consent unless restrictions appear in shareholder agreements. Public company shares trade freely on exchanges. Even privately held corporations offer better liquidity than partnership interests because share sales do not require unanimous consent or complex agreement amendments.
Perpetual existence independent of owner changes provides stability for long-term business planning. Shareholder deaths, divorces, or bankruptcies do not affect the corporation. Shares pass through estates or transfer through divorce decrees without disrupting business operations. This continuity benefits relationships with lenders, suppliers, and customers.
Professional management structure separates ownership from control allowing expert managers to operate the business while shareholders remain passive. The board of directors can hire and fire executives based on performance. Shareholders who lack business expertise can invest without participating in operations. This separation works well for large businesses requiring professional management.
Corporation Cons
Double taxation on corporate profits and shareholder dividends significantly increases the total tax burden. The combined federal corporate rate of 21% plus individual dividend tax rates of 0% to 20% creates effective rates potentially exceeding single taxation on pass-through income. State corporate income taxes add another layer. This additional tax cost can reduce returns to shareholders by 10% to 20% compared to partnership structures.
Rigid governance requirements mandate specific organizational structures that cannot be eliminated. Every corporation must have shareholders, directors, and officers even if one person fills all roles. Annual meetings must occur, minutes must be maintained, and corporate formalities must be observed. This administrative burden increases costs and creates opportunities for noncompliance that weakens liability protection.
Formation costs and ongoing compliance requirements exceed partnership expenses. Articles of Incorporation cost more to file in most states. Corporations must hold annual meetings, maintain detailed minutes, file separate tax returns even when electing pass-through taxation, and comply with more extensive reporting obligations. Professional fees for corporate maintenance often run thousands of dollars higher than partnership costs.
S corporation restrictions limit eligibility for many businesses. The 100-shareholder limitation prevents broad ownership. Restrictions on shareholder types eliminate corporate and partnership investors. The single class of stock requirement prevents preferred stock issuances or complex capital structures. These limitations make S corporations unsuitable for venture capital-backed companies or businesses planning significant growth.
Shareholders cannot deduct corporate losses on their personal tax returns. Unlike partners who receive Schedule K-1 showing their share of partnership losses, corporate shareholders get no loss deductions. Startup corporations often generate losses for several years, but those losses remain trapped at the corporate level. Shareholders receive no immediate tax benefit from these losses, making corporations less attractive for early-stage ventures.
Key Federal and State Law Distinctions
Federal Law Framework
The Internal Revenue Code governs tax treatment but does not regulate entity formation. States possess exclusive authority over business entity creation, governance, and dissolution. Federal law treats partnerships and corporations differently for tax purposes but relies on state law to determine whether an entity qualifies as a partnership or corporation.
The Revised Uniform Limited Partnership Act provides model legislation that 46 states have adopted with modifications. This uniform law creates consistency across jurisdictions but allows state variations. Three states—Louisiana, Vermont, and Wyoming—have not adopted RULPA and maintain different frameworks.
The Model Business Corporation Act provides similar guidance for corporation statutes. Thirty-two states have adopted versions of the MBCA, while others like Delaware, California, and New York maintain independent corporation codes. These variations create significant differences in shareholder rights, director duties, and procedural requirements.
Federal securities laws regulate the sale of partnership interests and corporate stock. The Securities Act of 1933 requires registration of securities offerings unless an exemption applies. Limited partnership interests qualify as securities, subjecting partnership offerings to these requirements. Most private placements rely on Regulation D exemptions, but compliance requires detailed disclosure documents and restrictions on investor solicitation.
Delaware vs Other States
Delaware leads as the incorporation destination for major corporations. Over 1.5 million business entities are registered in Delaware despite its small population. The state offers predictable court decisions through its specialized Court of Chancery, business-friendly statutes with maximum flexibility, and extensive case law providing guidance on corporate issues.
Delaware charges relatively low filing fees and imposes minimal disclosure requirements. Articles of Incorporation need only list authorized shares, registered agent, and incorporator. Directors need not be disclosed publicly. The state allows single-person corporations where one individual serves as sole shareholder, sole director, and all officer positions.
Delaware permits corporations to eliminate or limit director liability for breach of fiduciary duty except for loyalty violations, bad faith actions, intentional misconduct, or improper personal benefits. This provision, authorized by Section 102(b)(7) of the Delaware General Corporation Law, appears in most Delaware corporation charters and protects directors from monetary damages for ordinary negligence.
Other states impose more restrictive requirements. California requires corporations with principal operations in California to pay California income tax and follow California corporate governance rules, even if incorporated elsewhere. The state’s “pseudo-foreign corporation” statute applies California law to out-of-state corporations doing substantial business in California.
New York requires LPs to publish formation notices in two newspapers for six consecutive weeks. This unusual requirement costs $1,000 to $2,000 and creates delays. No other state imposes similar publication mandates for LPs, though several states previously required publication for LLCs.
State Tax Variations Impact
Nine states impose no personal income tax, making them attractive for partnerships. Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming allow partners to receive distributive shares without state income tax. New Hampshire taxes only interest and dividend income, exempting ordinary business income.
These states generate revenue through other mechanisms. Texas imposes a franchise tax on gross receipts exceeding $1.23 million. Washington charges a business and occupation tax on gross receipts. Nevada requires commerce tax on businesses with gross revenue over $4 million.
California’s 13.3% top personal income tax rate significantly affects partnership taxation. General partners face combined federal and state tax approaching 50% on partnership income. The state also imposes an $800 minimum annual tax on LPs even when they generate losses.
Several states require partnerships to withhold tax on behalf of nonresident partners. When a New York LP has Ohio partners, the partnership must withhold New York income tax on the Ohio partners’ distributive shares of New York-source income. Similar requirements exist in California, North Carolina, and 15 other states. Noncompliance triggers penalties against the partnership and general partners.
FAQs
Can I incorporate a limited partnership?
No. A limited partnership cannot be incorporated because these are mutually exclusive business entity types formed under different statutes. You can dissolve the LP and form a corporation, or use a corporation as the general partner, but the LP itself cannot become a corporation through incorporation.
Do limited partnerships provide the same liability protection as corporations?
No. Limited partnerships provide liability protection only for limited partners, not general partners. General partners face unlimited personal liability identical to sole proprietors. Corporations provide comprehensive liability protection for all shareholders, directors, and officers.
Are limited partnerships taxed like corporations?
No. Limited partnerships receive pass-through taxation under Subchapter K with no entity-level tax. Corporations face double taxation under Subchapter C unless they elect S corporation status. Partnership income is taxed once at the partner level.
Can a corporation be a general partner in a limited partnership?
Yes. Using a corporation as the general partner provides management control while maintaining liability protection. The corporation faces unlimited liability as general partner, but corporate shareholders remain protected by the corporate veil.
Must limited partnerships file annual reports?
Yes in most states. Limited partnerships must file annual reports updating partner information and registered agent details. Filing requirements vary by state, with fees ranging from $25 to $800. Missing deadlines triggers administrative dissolution.
Can limited partners vote on partnership matters?
Yes without losing liability protection if the partnership agreement and certificate authorize specific voting rights. Limited partners can vote on fundamental matters like dissolution or sale of substantially all assets. Management decisions risk control participation liability.
Do limited partnerships need written partnership agreements?
No legally, but practically essential. No statute requires written partnership agreements, but operating without one creates risks. State default rules may not reflect partners’ intentions. Written agreements prevent disputes and establish clear procedures.
Are foreign limited partnerships recognized in all states?
Yes but must register to do business. An LP formed in Delaware must register as a foreign LP in other states where it conducts business. Foreign registration requires filing applications and appointing registered agents.
Can limited partnership interests be freely transferred?
No typically. Most partnership agreements restrict transfers and require general partner approval. State law allows free transferability absent agreement restrictions, but nearly all agreements limit transfers to protect remaining partners’ interests.
Do limited partnerships expire after a certain time?
No unless the certificate specifies a term. Most states allow perpetual duration for limited partnerships. Partnerships with fixed terms must file amendments to extend duration or dissolve on the stated date.
Can a limited partnership elect S corporation tax treatment?
No. Only corporations can elect S corporation status under Subchapter S. Limited partnerships receive pass-through taxation under Subchapter K. The two tax regimes are mutually exclusive with different eligibility requirements.
Are limited partners considered self-employed?
No. Limited partners generally do not pay self-employment tax on their distributive shares because they do not actively participate in the business. General partners must pay self-employment tax on all partnership income allocated to them.
Can a limited partnership have no limited partners?
No. A limited partnership must have at least one general partner and at least one limited partner. Without limited partners, the entity is a general partnership where all partners face unlimited liability.
Do limited partnerships need an EIN?
Yes. The IRS requires limited partnerships to obtain Employer Identification Numbers for tax filing purposes. The EIN identifies the partnership on Form 1065 and Schedule K-1. Banks require EINs to open business accounts.
Can limited partnerships issue stock?
No. Limited partnerships issue partnership interests, not stock. Only corporations issue shares of stock representing ownership. Partnership interests convey different rights than stock and are governed by partnership agreements rather than corporate bylaws.