In this blog article, we are continuing the conversation about various types of corporate set ups. In the past, we covered Joint Ventures and General Partnerships. As a brief summary, a Joint Venture can be any agreement between two or more parties for a common goal. Partners often form Joint Ventures for a short period of time. When the partnership is in perpetuity, two or more people are best to form a General Partnership. However, General Partnerships do not protect the individual assets of the individual partners. As such, what do we do if one of the partners wants some kind of corporate liability protection?
What is a Limited Partnership?
General Partnerships become Limited Partnerships when at least one partner wants liability protection. In other words, this partner wants management and advisory powers but doesn’t want a lawsuit to expose his/her assets. This may start to sounds familiar because a Limited Partnership starts to look like the common Limited Liability Company.
Why Would Anyone Form a Limited Partnership?
This kind of agreement may also start to sound a little odd. Why would one person maintain all of the liability while the other person gets to enjoy legal protection? Most often, we help people form Limited Partnerships when someone is really in it just for the investment. We also use this kind of partnership a lot when the investor is a mentor or expert in a particular field. An investor may come to you and say, “I will give you $50,000.00 for 50% ownership interest to help start your business. I have experience growing this kind of business. We can grow it and then you can pay me back, plus interest. However, I you need to maintain all of the liability if there is a problem. I don’t want my investment or my personal money exposed to a lawsuit because I have a lot of money.”
Is This a Good Idea for You?
Since we focus primarily on gym businesses, we will say that, in the gym business realm, these are not common and not a great idea. We assume most new gym owners are not sitting on millions of dollars (yet!). A gym owner cannot absorb the financial liability as the liable partner in a Limited Partnership. There are ways to make this more palpable if the gym owner absolutely has to have the investment.
If, however, you are the investor, if you are the expert, a Limited Partnership is a great idea.