The Limited Partnership Can Lead to an Investor Relationship
A business will be structured as a (i) Sole Proprietorship; or (ii) Partnership; or (iii) Corporation.
A Limited Partnership is a type of Partnership that has certain benefits, particularly for businesses looking for investors.
In a Limited Partnership, there needs to be at least 1 general partner and at least 1 limited partner. The general partner is responsible for the active management of the Limited Partnership’s business and has unlimited liability. On the other hand, the limited partner is similar to a silent investor, as it cannot take an active management role in the business. The limited partner’s liability is also limited to its investment.
In addition to the limited liability, investors are drawn to a Limited Partnership because the Limited Partnership is not a taxable entity. This means that part of the profits and losses flow directly down to the limited partners, who can then apply the profit or loss in their personal tax return.
As an example, let’s say you have a business idea, that you are prepared to carry out, and you require investors. If you create a Limited Partnership, you will be the general partner and will be involved in the management of the business. The limited partners will be silent investors, with limited liability, who will be able to apply business losses of the Limited Partnership against personal income, to an extent, while waiting for the business idea to take off.