Running a business can be difficult in New York, especially as a start-up. It can seem like an overwhelming maze of laws, regulations and concerns when trying to get financing, garner a foothold, advertise, attract customers and, hopefully, become a success. When deciding on a business formation, many will choose a limited partnership.
Referred to as an LP, it has two or more owners. There needs to be one general partner who is responsible for the debts. There can be limited partners who will be liable for what they have invested. Since the general partner has unlimited liability, they are at greater risk. All who are involved with the business should be aware of the law for loans and business transactions.
Know the facts about loans with a limited partner
A limited partner can loan money and engage in other business with the partnership. As long as they are not a general partner, they can receive a proportional share of the assets. With these claims, they cannot have collateral against property owned by the partnership. Nor can they receive payments, property transferred to them or be released from liability if there are not sufficient assets to clear liabilities to those who are not general or limited partners. If this were to happen, it would be considered fraud on the partnership’s creditors.
When dealing with a limited partner, the general partner is vulnerable to all debts and obligations. The benefit of being a limited partner is that they are only responsible for their investment. If, for example, the business falls on hard times and needs to file for bankruptcy, that is the responsibility of the general partner.
The limited partner does not take part in the business and its daily operations. This can be beneficial for them as they can profit in a successful entity. If they do get involved in the business operations, then their liability protection could be jeopardized.
Prepare for the complexities of running a business
Experienced businesspeople and newcomers to the business world can be caught up in the legal issues they will inevitably face and make mistakes that can cost them. Knowing how an LP works, the possible risks and how to mitigate them is key to being successful and avoiding problematic missteps.
From the beginning, it is wise to understand the intricacies of business formation, financing, dealing with limited partners and general partners, and more. Consulting with professionals who understand business formation and planning can help.