What is a limited partnership and
how can it be used in real estate investing operations?

By JJ Childers

Over the course of the past couple of months, we have begun taking a look at the various legal entities available for real estate investing and taken a look at why we would want to utilize those entities. In this segment, we will be looking at the limited partnership. The main reasons to form a Limited Partnership are asset protection, estate planning, and tax reduction. Throughout this answer, we will take a look at how this entity accomplishes those goals.

The first thing you need to know is that when you form a limited partnership, you create a separate legal person. You, in your individual capacity, are a partner of that new entity. Specifically, you want to be a limited partner of that entity. A limited partnership should then have either a corporation or a limited liability company to serve as its general partner. Limited partnerships are made up of general partners (who have 100% control and 100% liability) and limited partners (who have virtually 0% control and virtually 0% liability).

As you can imagine, this essentially places you in a Catch-22 in determining whether you would like to be the limited partner or the general partner. If you are the limited partner, you have no personal liability but you give up control. But if you are the general partner, you get control but you also have potential personal liability. Sounds tough, doesn’t it?

The way to overcome this dilemma is by establishing another legal entity to serve as the general partner. As such, the information below is presented with the assumption that you will only be utilizing a limited partnership with an LLC or a corporation as the general partner. As the head of the corporate or LLC general partner, you can control the limited partnership. However, if the business is sued, you (as an individual) can be protected from personal liability. Outside of this structure, I do not recommend a limited partnership.

Asset Protection

The best way to illustrate how the limited partnership gives us asset protection is to take a look at how it would work. You see, lawsuits typically come from one of two directions: business or personal. When your business is sued, there are provisions in the law so that either an LP or a corporation can protect you from being sued personally (again, as long as the limited partnership has a corporation or limited liability company as its general partner).

However, when you are sued personally, the LP may provide better protection. An LP has one or more general partners and one or more limited partners. A corporation has shareholders. Corporate law allows your stock to be confiscated in a personal lawsuit. In contrast, there are provisions in the law such that when you are sued personally, your partnership interest ("ownership") in your LP may be protected from being taken away from you. This is one reason why the LP has become a very popular choice for owing assets such as real estate.

Another great benefit is that it takes your name off of the title of the assets. Owning an asset in your own name, such as a business, an investment property or an automobile, provides an easy target for anyone looking to see what type of assets you may have. Prior to initiating a lawsuit, it is quite common for an attorney to perform an asset search. If no assets can be located in your name this may decrease the chance that litigation will be pursued. Placing assets in the name of a Limited Partnership may provide a cloak of privacy between you and those contemplating legal action against you. This privacy can help you to avoid a lawsuit from ever occurring.

Estate Planning

Another tremendous benefit of a limited partnership is all of the advantages that one can obtain from implementing a variation of the limited partnership known as the “family limited partnership.” Our next “Ask Our Attorney” segment will deal specifically with the topic of family limited partnerships. In that discussion, we will focus on what a family partnership is, what it can and should be used for, and what it is not. This will be especially helpful for those of you who are involved in real estate as a wealth-building tool. As you know, there is no better way to build wealth than through the area of real estate.

Tax Advantages

The next great benefit to having your real estate properties in a limited partnership is the potential for greater tax deductions. Typically, there are more tax deductions available to a limited partnership than to those who do not utilize any sort of legal entity. Additionally, the audit rate for the LP is much lower than the self-employed. You may own and be employed by your LP at time same time, thus, eliminating the Schedule “C” self-employment return from your list of filed IRS tax documents. The IRS seems to give preferential treatment to corporations and limited partnerships with regard to tax deductions. Over the course of this “Ask Our Attorney” series, we will be spending time with the issue of taxation and what types of things that we can do to increase our returns by reducing our taxes. If you would like to learn more about ways to reduce your taxes, protect your assets, or plan your estate, remember that you can always contact us at info@secretmillionaire.com for more information.

ACTION STEP

Between now and next time, think about the role that the two key players play in the operation of the limited partnership. Put yourself into the shoes of both the limited partner (you as an individual) and the general partner (you as the head of the LLC or corporation). When a decision comes up, realize that if you make that decision or exercise any sort of control, you are doing so in your capacity as the head of the LLC or corporation that you have serving as the general partner. You are not acting for yourself as an individual. It might take some getting used to but you’ll get the hang of it.

About JJ Childers

JJ Childers is a licensed attorney and active real estate investor and developer.

As an attorney, he deals primarily with the areas of asset protection, estate planning, and tax reduction. Simply put, he assists people with overcoming the obstacles of lawsuits, income taxes, and death taxes. He travels the country extensively sharing his strategies with other real estate investors as well those involved in various types of small businesses. Through his innovative and dynamic strategies, he has literally helped thousands of people save millions of dollars in taxes.