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Limited Partnership - Explained - YouTube
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Okay. So what's a limited partnership?
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Well a limited partnership is a special
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form of partnership that is very
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distinct from the general partnership,
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the best way to understand it is that
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you create two separate ownership and
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control classes. Okay. It's basically a
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general partnership or a sole proprietor
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with a limited partner, okay, so think of
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it as a general partnership where you
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have a limited partner and let me
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describe the role of the limited partner.
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It's someone who puts in assets or
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invest in the business and thereby has
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an ownership interest in the business
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but that limited partner cannot exercise
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regular control of the business, okay, and
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that's the standard, no control they can
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offer guidance to the general partner
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they can offer other resources to
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increase their ownership of the interest
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and they can even be hired to act as
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agents on behalf of the partnership but
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they cannot exercise control or
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decision-making over the daily
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operations of the partnership. So let's
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look through the individual elements and
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you'll be able to compare these to that
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of the general partnership. So creation,
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general partnership arises by default a
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limited partnership has to be filed with
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the state, okay, so in order to have a
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limited partnership the state has to
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recognize it so you have to go through
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the process of filing the necessary
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documents with the Secretary of State's
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office this is an extremely easy process
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with any Secretary of State's office.
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Continuity, the continuity is exactly the
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same as that in a general partnership
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there is no passing of interest along
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unless there is a document a
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partnership agreement that indicates the
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ability to trade or sale or transfer
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ones ownership interest, okay, so by
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default there is no continuity. Okay.
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Ownership and control, well we already
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introduced this control the general
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partner has complete and total control
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over the partnership okay the limited
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partner might be able to vote on certain
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things that
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the partnership agreement indicates that
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a party has voting rights for to make
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certain decisions but by and large the
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general partner has to control all daily
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affairs all operations of the business.
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Ownership,
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well ownership is the same, okay, the
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limited partner is an owner of the
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business and the general partners owner
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business,
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by default they split ownership with in
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respect to their ownership percentages,
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now this can obviously change just like
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in a general partnership you can have a
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special allocation that says well the
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general partner gets 80 percent of the
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profits at the end of year and the
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limited partner gets 20 percent, that's
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acceptable, okay, as long as there's an
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economic reality of economic
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justification for it and in a limited
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partnership that's often easy because
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the general partner is doing most of the
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work or the limited partner put in most
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of the assets and thereby and incurs
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most of the risk associated with the
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business, okay, so that's ownership and
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control. Personal liability well this is
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drastically different from a partnership
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the general partner or partners still
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face personal liability for any debts or
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liabilities of the business while the
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limited partner is limited in liability,
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the only liability they can suffer is
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they can lose the extent of their
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interest or the extent of the money that
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they invested in the business, so if the
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limited if you form a limited
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partnership by having a limited partner
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who gives $100,000 in the general
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partner who is going to run the business
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and invest all the time and effort to
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run the business.
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Well if someone sue's the business and
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it's liable for a million dollars
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well the limited partner can only lose
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that hundred thousand dollars that
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they've already put in there that's it
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just the extent of their interest in the
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business where the general partner would
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be liable for the risk whatever is not
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covered by business assets so if there's
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only a hundred thousand dollars left in
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the business the limited partner I mean
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the general partner could be liable for
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that nine hundred,
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so that's very important. Compensation,
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again the individuals the limited
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partner in general partner don't receive
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salaries they receive compensation based
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on a pass-through system whatever the
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profits are at the end of the year or
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whatever revenue is left over can be
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passed to is passed to the limited
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partner and general partner for tax
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purposes anyway. Now if the money's
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maintained in the business it's the same
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as in a general partnership, say the
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partnership makes a profit of a hundred
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thousand dollars and passes nothing to
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the general partner and unlimited
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partner the both of these partners will
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still be taxed on the money in respect
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to their ownership percentage or in
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respect to their rights in a special
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allocation of profits so that's a
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really important thing. Now there are
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again there are very complicated tax
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rules associated with each business
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entity type the limited partner has in
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many cases a different taxation
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structure, they may not be subject to
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self-employment taxes for the
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compensation that passes through the
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entity there may be things called
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passive and active losses that can or
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cannot be taken or used by the limited
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partner versus the general partner.
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So there's like I said very
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complicated rules there for taxation but
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to understand this pass-through
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structure that whatever profits exist at
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the end of the year are taxed to the
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partners in respect to their ownership
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structure or pursuant to a special
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allocation is the baseline for
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understanding this business entity.
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