Form a limited partnership

A limited partnership has two kinds of partners: general and limited. The rights and obligations of a general partner are very similar to those of a partner in a normal partnership. A general partner has the right to participate in the management of the partnership and has unlimited personal liability for its debts. A limited partner, on the other hand, is personally liable for the debts of the partnership only to the extent of his or her investment in it and has little, if any, say in its management.

Limited partnerships are formed if you have financial backers for your venture who do not want to be involved in running it. In fact, limited partners who become actively involved in the management of the partnership run the risk of losing their limited personal liability.

While a general partnership can be entered into informally, a limited partnership is created only when a written agreement is drawn up and it is formally registered with the appropriate authorities.

The steps to take

• Write a partnership agreement that addresses the key issues of profit sharing, asset distribution, participation rights, dissolution prevention, a buy-out agreement, asset appraisal and expulsion or addition of partners. It is advisable to engage the services of a lawyer in drafting such a document.
• Determine the value of the partnership using some generally recognised and acceptable method. This will usually be based on a combination of assets and a multiple of earnings, sales revenue or perhaps both.
• Decide how much additional money is needed and hence the contribution required from a limited partner.
• Set up a system to keep the new limited partner informed on what is going on in the business.

Action Checklist

• Think through your other options for raising money. Taking on a limited partner may not be right for you or your business
• Although a limited partner will not be involved in the day to day running of the business, they may well want to see how you work and be kept fully informed. So it makes sense to ensure anyone you take on as a limited partner meets the same personal criteria you applied to taking on a general partner
• Make sure the prospective limited partner knows the ground rules