Limited partnerships provide their investors the liability protection of a corporation while allowing them the tax benefits of a partnership. Limited partners simply buy interest in a partnership but remain completely uninvolved in business decisions and operation. As a result, the law absolves them of legal responsibility for the actions of the general or managing partners in charge -- who bear full liability for their business. Unlike with corporate shareholders, the law allows limited partners to claim business profits and losses on their personal income taxes, which many investors like. However, just like corporations, limited partnerships can buy and create assets including other companies and hold them as subsidiaries.
Limited partnerships, like both simple partnerships and corporations, can own assets. This includes acquiring other companies or businesses. Owning and operating businesses for additional revenue or to complement a current business is perfectly legal under both state and federal laws.
Companies often develop their own subsidiaries by investing in new ideas, creating new branding and diversifying their lines of business. Limited partnerships can also engage in this. Limited partnerships can apply to their counties of operation for fictitious business names or "doing business as" names to give different branding identities to their various subsidiaries and ventures. They can also create corporations fully owned by the limited partnership -- using the partnership as a shell or holding company.
Assets, expansions and subsidiary corporations have tax implications for business partners -- both limited and general. Increased revenues, shifts in profit-sharing and valuation of assets can shift owners' tax liabilities, often increasing them. Because taxes fall to the individual owners, rather than the business itself -- as they do in corporations -- limited partners may find their personal income tax rate and liability increase through no fault or action of their own. The decisions of general partners in driving a business can significantly impact limited partners -- especially as general partners' business considerations usually don't take limited partners' personal finances into account.
Accounting and Disclosure
Limited partnerships must be open and transparent about the assets they own, including subsidiaries. Failure to report assets or income to the Internal Revenue and state tax authorities can result in penalties and even criminal charges. Similarly, partners should avoid mingling personal assets with their limited partnership to evade taxes. Anything listed as subsidiary or company asset should truly belong to the partnership -- and not be placed there in an attempt to reduce a partner's personal valuation or liability.
Eric Feigenbaum started his career in print journalism, becoming editor-in-chief of "The Daily" of the University of Washington during college and afterward working at two major newspapers. He later did many print and Web projects including re-brandings for major companies and catalog production.