limited Partnerships Flashcards
What is a Limited Partnership
A limited partnership (LP) is an entity that allows all of the economic events of the partnership to flow through to the partners. These economic events are: Income. Gains. Losses. Tax credits. Deductions.
What is a Limited Partner
Put up the investment capital. Losses are limited to their investment. Receive the benefits from the operation. May not exercise management over the operation. May vote to change the objective of the partnership. May vote to switch or remove the general partner. May sue the general partner, if the general partner does not act in the best interest of the partnership.
What is a General Partner
The general partner is the person or corporation that manages the business and has unlimited liability for the obligations of the partnership business. The general partner may also: Buy and sell property for the partnership. Receive compensation for managing the partnership. Enter into legally binding contracts for the partnership. The general partner also must maintain a financial interest in the partnership of at least 1%. The general partner may not:
Commingle funds of the general partner with the funds of the partnership.
Compete against the partnership.
Borrow from the partnership.
Conditions for Preferential Tax Treatment
In order to qualify for the preferential tax treatment, a direct participation program (DPP) or LP must avoid at least two of the following
These characteristics are: Continuity of life. Profit motive. Central management. Limited liability. Associates. Freely transferable interest.
Structuring Limited Parnerships
The foundation of every limited partnership is the partnership agreement. All limited partners must be given a copy of the partnership agreement. The partnership agreement will spell out all of the terms and conditions, as well as the business purpose for the partnership. The powers and limitations of the general partner’s authority will be one of the main points detailed in the partnership agreement. Prior to forming a limited partnership, the general partner will have to file a certificate of limited partnership in the state in which the partnership is formed.
Requirements of a Limited Partnership
Name and address of the partnership.
A description of the partnership’s business.
The life of the partnership.
Size of limited partner’s investments (if any).
Conditions for assignment of interest by limited partners.
Conditions for dissolving the partnership.
Conditions for admitting new limited partners.
The projected date for the return of capital, if one is set.
What is in the Subscription agreements
The subscription agreement will include: A power of attorney appointing the general partner. A statement of the prospective limited partner’s net worth. A statement regarding the prospective limited partner’s income. A statement from the prospective limited
What is a DPP
Direct participation programs (DPP) are organized as either limited partnerships or as subchapter S corporations. These entities allow for the flow through of income and losses, and the DPP has no tax consequences. The DPP will only report the results of its operation to the IRS. The responsibility for paying any taxes due rests with the partners or shareholders. DPPs allow the losses to flow through to the investors. Losses from DPPs can only be used to offset the investor’s passive income. Investors may not use the losses to shelter or offset the ordinary income. Investors should not purchase DPPs simply for the tax benefits; they should purchase them to earn a return. Any DPP that is found to have been formed simply to create tax benefits may subject the investors to strict penalties. Investors could owe back taxes, fines, or be prosecuted for fraud.
Factors to consider when investing in a Limited Partnership
The economic viability of the program. Tax considerations. Management's ability. Lack of liquidity. Time horizon. Whether it is a blind pool or a specified program. Internal rate of return.
Blind pool vs specified program
A blind pool is a partnership where less than 75% of the assets that the partnership is going to acquire have been identified. In a specified program, more than 75% of the assets that the partnership is going to acquire have been identified.
Types of Limited Partnership loans
With a nonrecourse loan, if the partnership defaults, the lender has no recourse to the limited partners. With a recourse loan, in the event of the partnership’s default, the lender can go after the limited partners for payment. A recourse loan can increase the investor’s cost base. Partners must monitor their cost base and adjust it for: Cash or property contributions to the partnership. Recourse loans. Any cash or property received from the partnership.
