Limited Partnerships and Investment Properties
By Mitchell Weisman of Rubin, Weisman, Colasanti, Kajko & Stein, LLP, Andover MA
Mr. and Mrs. T came to my office the other day. They are buying a two family home for investment purposes. They did not want to own the two family in their own names, so they asked me what their options were. I told them they had several choices and each had advantages and disadvantages that I would try to explain in the next several articles.
The choices are: partnership, limited partnership, limited liability partnership, trust, Limited Liability Company or corporation. YIKES. So many entities to choose from! Let’s start with a partnership, which is often called a general partnership.
Two or more people can join together to form a partnership. They can choose a name to run the partnership business and the only requirement is that the partnership must register the partnership name with the local city or town clerk. There is a nominal charge. There may or may not be a written agreement. Mr. and Mrs. T probably wouldn’t need a written agreement between them but two or more unrelated people should seriously consider a written agreement if they want a partnership. So, the one major advantage is simplicity of formation. The partnership must file its own federal and Massachusetts tax returns. So, Mr. and Mrs. T asked me, what disadvantages there might be.
Each partner is a general partner and each general partner is personally responsible for his own acts AND each partner is responsible for every other partner’s acts as well. So, as far as Mr. and Mrs. T is concerned, there appears to be no real advantage to forming a partnership to own the two family home.
Mr. T asked about a “limited partnership”. So I explained to him that a limited partnership is a form of partnership that has general partners and limited partners. The general partner or partners operate the business and are personally liable for their acts. The limited partners MUST not interfere or take part in any of the activities of the partnership or they will be called general partners and face the liability of general partners. This form of arrangement would require a carefully drawn written agreement to clearly identify the general and limited partners. Either Mr. T or Mrs. T would be the general Partner and the other would be the limited partner. Whichever person became the limited partner would have to avoid taking part in the business activities of the partnership. A limited partnership is no longer a favorite device to recommend to my clients. It was a popular form of ownership in the 1970’s but it is rarely used today.
Next and probably the form of ownership that has supplanted partnerships and limited partnerships is a limited liability partnership (LLP). In an LLP, all the partners have limited liability, and are similar to the shareholders in a corporation. The advantage of the LLP is that each partner has limited liability from the acts of the OTHER partners, but ALL partners who are involved with any acts of negligence are still personally liable. The other partners are protected from the acts of the negligent partner.
Mr. and Mrs. T said they had to go home and digest these forms of ownership but they want to come back to discuss trusts, limited liability companies and corporations. I told them to check the next blog and I would be there to discuss these remaining entities.
As a real estate agent, I never try to pretend to be an insurance agent, lawyer, or home inspector. I DO work together with these professionals and can refer people to my buyers and sellers that I (or other of my clients) have done business with. I am really happy to have the author of this blog, Mitchell Weisman, be one of the attorneys that I work with regularly! :)
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