A limited partnership may be the most suitable entity for a new business venture because it allows the partners to raise capital from private investors, while providing them with limited liability protection.

If one of your major goals is to raise capital to fund the venture without giving up control of the business and without being saddled with considerable start-up debt, a limited partnership will allow you, as the general partner, to manage and operate the business with little intervention from the other partners. In addition, it will enable you to raise equity capital from investors who receive limited partnership interests in exchange for their contributions. As limited partners, they will be able to share in the entity's financial results without having to manage the business or risk personal liability for it.

Care must be exercised to ensure that the limited partners do not inadvertently lose the protection of limited liability by participating in the management of the business. Merely consulting with you will probably not result in personal liability as long as you, the general partner, remain the ultimate decision-maker. A limited partner may become personally liable because of his own acts such as guaranteeing a partnership debt.

One drawback to a partnership is that you, as general partner, will be personally liable for the entity's debts. This is the “price” a general partner must pay in exchange for the right to operate and manage the enterprise.

The risk of this liability can be minimized somewhat by:

(i) creating a corporation to manage the partnership and serve as general partner, and

(ii) procuring adequate insurance to cover potential liabilities arising from operation of the business.

Since the partnership is a pass-through entity for tax purposes, each partner must include his share of partnership income, deduction, credit, and loss, on his individual tax return. You should note, however, had we decided to use a “regular” corporation rather than a partnership, the earnings would be taxed at a higher effective tax rate. This is because they would be taxed once when earned by the corporation and again when distributed to shareholders.

With proper planning, the limited partnership can be structured to provide special allocations of various tax benefits that make the venture more attractive to prospective investors. For this reason, a limited partnership may be a better choice for a new venture than an S corporation. However, these special allocations, in order to be respected by the IRS, must have what is known as “substantial economic effect.”