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Limited
Partnership
In a Limited Partnership, one or more ‘general" partners
manage the business while 'limited' partners contribute
capital and share in the profits but take no part
in running the business. General partners remain personally
liable for partnership debts while limited partners
incur no liability with respect to partnership obligations
beyond their capital contributions.
The
Limited Partnership has been very widely used for
investment purposes. In the last 30 years, most major
financial companies have used the LP form to channel
private capital into real estate, oil and gas and
mezzanine financing. These LPs are normally structured
to be long-term investments (typically 10 to 15 years
with extension rights at the partnership's option)
and do not make any liquidity provision in the event
the investor decides to sell their partnership interest
prior to the termination of the LP.
Normally,
death, disability, or withdrawal of a general partner
dissolves the partnership unless the partnership agreement
provides otherwise or all partners agree, in writing,
to substitute a general partner. Death or incompetence
of a Limited Partner has no effect on the partnership.
The Family Limited Partnership (FLP), which is simply
a Limited Partnership used by one family, has become
the leading form for asset protection and estate planning
in the US. But there are some legal dangers in many
states, where a creditor is permitted to “foreclose”
on a partnership or LLC interest. A “foreclosure”
is a seizure of the debtor’s interest and that
is a very powerful weapon for the plaintiff. Thus,
an asset protection structure using an FLP must also
protect ownership interests with a trust.
In
May, 2005, the US Treasury and the Internal Revenue
Service finalized regulations on the tax withholding
obligations of US partnerships that include foreign
partners.
Foreign
individuals were subject to US tax for income from
doing business in the US, in addition to income earned
in the US through a partnership. To ensure the tax
gets collected the IRS requires that partnerships
withhold tax on behalf of the foreign partner.
The
final rules, first proposed in September 2003, provided
guidance on how to determine a foreign partner's share
of partnership income and to calculate withholding
tax and payment dates. The matter of interest, penalties
and extra taxes for failure to comply with the regulations
were also addressed.
In
addition, the Treasury also issued related proposed
and temporary rules covering certain tax and non-tax
attributes of a foreign partner for purposes of determining
tax withholding obligations.
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