Limited Partnership (LP)

What is a Limited Partnership (LP)?

An LP is a relatively new type of entity in the U.S. It combines the limited liability of a corporation with the pass-through taxation of a partnership. Owners (or members, as they are called) of an LP can be individuals or any type of entity, from anywhere in the world, and unlimited in number.

Using a Delaware LP, non-resident aliens of the U.S. can legally avoid all U.S. federal taxes for their non U.S. business activities.

American clients use LP's for the tax benefits also, but the primary reason for using the LP in the USA is its heightened protection against judgment creditors. In a General Corporation, formalities must be followed or creditors can destroy the protection from personal liability by "piercing the corporate veil". These formalities, such as stockholders and directors meetings, minutes, officers and director elections can be eliminated in the LP, thus making it much more difficult to pierce.

Also, a judgment creditor of a member of an LP cannot seize control of the assets of the LP, or the member's voting rights, as they may be able to with a corporation.

The LP is a hybrid business vehicle that combines some of the best features of corporations and partnerships. Like a corporation, an LP has a legal existence separate and distinct from its owners; and its owners and managers are not personally liable for the company's debts and obligations. Like a partnership, an LP can be treated as a pass-through entity for tax purposes. This feature, when combined with non-U.S. source income, means non resident aliens of the U.S.A. will avoid all U.S. taxation when using an LP.

The operations and management of the LP are governed by a written agreement among its owners that is not required to be publicly filed or disclosed to the Delaware Division of Corporations. As a result, an LP allows secure anonymity and the ability to create a customized management structure, which prescribes the economic relationship among owners. The agreement can be written in any language and it is not required to be translated into English.

The Delaware LP statute allows parties to define their business relationship in the written agreement as they so desire. This is called "freedom of contract". Delaware Law provides rules only for those matters on which the parties have failed to agree. The stated policy of the Delaware LP law is to give maximum effect to the principle of "freedom of contract" and to the enforceability of LP agreements. The contractual flexibility offered by the Delaware Act is unmatched by any other LP statute.

If you properly "check the box" when applying for an EIN, a Delaware LP will be treated as a partnership for Federal income tax purposes; therefore, it will not be subject to U.S. Federal income tax. For non-resident aliens of the USA, this means Delaware is an attractive jurisdiction for benefits typical of many "offshore Jurisdictions". Combine that with the added strength of the USA's fiscal infrastructure, and you have an attractive comparative advantage.

While the Delaware Act permits a Delaware LP to be managed by its members, it does not require members to be managers. More importantly, it also provides that no member or manager is obligated personally for any debt, obligation or liability of the Delaware LP solely by reason of such person's being a member or acting as a manager. This limitation on personal liability compares favorably with the limitation on personal liability enjoyed by stockholders of a Delaware corporation.

If properly selected on the SS-4 form, a Delaware LP will be treated as a partnership for Federal income tax purposes; therefore, it will not be subject to U.S. Federal Income Tax. This means that a Delaware LP can offer the same tax advantages as a Chapter S corporation or a limited partnership, including the ability to provide through a written agreement for allocations of income and/or distributions to members in amounts which differ from the members economic interest in the LP, as well as the ability to provide basis to members for non-recourse debt. A Delaware LP will also provide greater tax flexibility in areas of distributions and can be used as a valuable tool for estate planning and wealth transfers.

Key Elements of the LP: