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.
Even better,
he has the knowledge and experience to apply these strategies to real
estate investors in particular. He teaches these strategies to help
real estate investors build in more profits to their real estate deals
and to properly protect those profits. The unique combination of being
both an attorney and real estate investor make him a hot commodity with
real estate investors throughout the country.