Choosing Your Washington Business: Limited Partnership

Basic Considerations:

This series of article describes certain basic considerations and costs involved in forming a Washington business. Please note that choosing a business form should not be done in vacuum. Consideration as to how this decision may impact future alternatives is critical. For example, converting a LLC into a Corporation immediately before the business is acquired, rather than at an earlier time, may prevent the transaction from being tax-free. This article is only an overview, particularly as to tax issues and should not be substitute for a professional advisor’s analysis and recommendations based on your individual fact situations when establishing your business.

Selecting the Form of Business Organization:
No single factor is controlling in determining the form of business organization to select, but if the business is expected to expand rapidly, a corporation will typically be the best alternative because of the availability of employee incentive stock plans; ease of accommodating outside investment and greater long-term liquidity alternatives for shareholders. A corporation also minimizes potential personal liability if statutory formalities are followed.

The characteristics of a Business are described below, followed by an overview of other traditional forms of business organizations. Each of the following factors is described for comparison purposes: 1) statutory formalities of creation, 2) tax consequences, 3) personal liability of owners, 4) ease of additional investment, 5) liquidity, 6) control and 7) legal costs. This article will focus on Limited Partnerships.

A Limited Partnership ('LP') is a partnership consisting of one or more general partners and one or more limited partners which is established in accordance with Washington Partnership Law. Like a corporation, this entity has no legal existence until paperwork has been filed with the Washigton Secretary of State. The LP is useful when investors contribute money or property to the partnership, but not actively involved in its business. Examples of LPs include hedge funds, private equity firms, and investment groups. So long as the 'limited partner does not actively involve themselves in the management of the business, a limited partner is liable only to the extent of his involvement. General partners, however are personally responsible for partnership obligations and for each other's act on behalf of the partnership.

Tax Considerations:

For tax purposes, both general partners and limited partners are generally treated alike. Income, gain and losses of the partnership 'flow through' to them and affect their individual income taxes. At the end of each tax year, partners will receive K1 forms outlining their individual tax liability or loss.

For more information on a Limited Partnership, please consider seeing an experienced Kirkland Business Formation Attorney.