The difference between a general partnership and a limited partnership is the lack of day-to-day involvement and management of the limited partner(s). Limited partnerships must have both types of partners. General partners run the business and have personal liability for the debts and claims of the partnership. Limited partners are like silent investors, providing financial backing for your business but having a hands-off relationship with regard to running the business. Limited partners have no personal liability for business debts and claims. (Limited partnerships are typically seen in ventures requiring a large cash investment and a relatively small decision making body like real estate.)
To set up a limited partnership, you need to file a written agreement and a Certificate of Limited Partnership with your state. If you plan to operate in another state, you must file a form similar to the Certificate of Limited Partnership and pay an initial and annual fee to the other state(s). The name of a limited partnership must contain the words "Limited Liability Partnership", "L.L.P." or "LLP" and cannot contain words like "Corporation", "Incorporated" or any abbreviation of them.
Limited partners have only an economic interest in the partnership; they have no direct ownership of the partnerships assets. Consequently, you won't need to consult them with regard to the use of the assets. Similarly, they have no ability to create obligations or commitments on behalf of the partnership.
Unlike a general partnership, the separation of a limited partner from the partnership has no impact on the existence of your partnership.
The tax treatment for a limited partnership is the similar as a general partnership and an S corporation. Profits and losses are passed through to all partners, both general and limited as defined in the partnership agreement (In an S corporation, profits and losses are passed on based on relative percentage of ownership). In limited partnerships, the partnership interest of the limited partners is sometimes proportionately less than their investment. Should your business lose money, the amount of loss your investor(s) can use to shelter income is limited to the amount they invested. In a limited partnership, some types of debt incurred by the partnership can augment losses. This augmentation is not available to the owners of an S corporation.
Because there have been abuses of tax law, the IRS looks carefully at designation of limited partnerships and will reclassify yours as a corporation if it believes you are abusing the law. The IRS looks at characteristics common to corporations to determine if the designation as a limited partnership is questionable. If three of the following corporate characteristics exist, the IRS will reclassify your limited partnership:
While it is possible to set up your consulting company as a limited partnership, it is unlikely that you will need enormous amounts of cash to get started. Limited partnerships therefore may not be a practical choice for a small consulting company. Consult your tax or legal advisor.
| Limited Partnership | California | Illinois | Massachusetts |
| Initial State Filing Fees | $70 | $75 | $200 |
| Annual State Fees/Tax | N/A | $15 (biennial) | None |
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