Delaware Limited Partnership formation is a convenient and affordable option for businesses of all sizes. The main appeal of this structure is liability protection. As a limited partner, you’re only liable for the incurred debt for which you’re responsible.
While general partnerships are often coveted for their general lack of stringent compliance and operational freedom, there comes a point where the business will outgrow its current structure. That’s why you’ll see most partnerships making the transition to either an LLP or LLC to accommodate their newfound needs.
But for those that want to raise capital without diluting too much ownership and control, a Delaware Limited Partnership is good middleground to consider. It’s essentially a form of partnership that allows for role-based liability protection and some tax planning opportunities on the side.
In this blog post, we’ll discuss the steps of Delaware LP formation and what you need to do after that.
What is a Delaware Limited Partnership?
Delaware Limited Partnerships (DLPs) are a type of business entity in the United States. They are formed by filing a certificate of limited partnership with the Delaware Secretary of State.
DLPs have two types of partners: general partners and limited partners. General partners manage the business’s day-to-day operations and are liable for its debts. Limited partners are only liable for the amount they invested in the business and do not take part in its management.
DLPs offer a number of advantages over other types of business entities.
- Personal asset protection for limited partners.
- Pass-through taxation
- The general partner has total authority over the organization and its assets.
- Passive investors have a high investment potential. Long-term rental income is included into investment possibilities.
- Heirs can be paid without receiving the assets. This decreases the estate tax repercussions while maintaining the revenue stream.
What is the aim of Limited Partnerships?
There are only utilized for the two aims listed below.
- To build commercial real estate projects
The limited partner is responsible for capital investment and also the general partner is in charge of project management and construction. The limited partner receives a return on the completed project’s income stream.
The limited partner functions as a passive investor in this case. A limited partnership can manage and build projects such as apartment complexes and shopping malls.
- To make use of an estate-planning vehicle
The limited partners act as the general partners’ successors, whereas the general partners are the parents who own the real estate. Typically, commercial real estate is available.
This kind of limited partnership, also known as a Family Limited Partnership, is most advantageous when the limited partnership’s asset generates an income stream and the parties involved do not want the asset sold following the death of the general partner.
Limited partnerships were also a coveted choice for filmmakers when there was no LLP or LLC yet. Directors valued their creative freedom above all else, which can be easily taken away in an LLC or LLP as there are other stakeholders in the mix. A limited partnership allows for passive funding from relatives and family members to help directors get their projects off the ground while still retaining creative reign.
Delaware LP formation with 6 steps
- Step 1: Choose an LP Name
The Delaware Limited Partnership Act (DLPA) requires that all LPs formed in Delaware have a distinctive name. The name must include the words “Limited Partnership” or the abbreviation “L.P.” It cannot be the same as the name of any other business entity registered with the Delaware Division of Corporations.
There are some additional considerations to take into account when choosing an LP name. The name should be easy to remember and spell. It should also be reflective of the business’s purpose. For example, a Delaware LP formed to invest in real estate might choose a name like “Delaware Real Estate Limited Partnership.”
Once you have chosen an appropriate name for your company, you will need to file paperwork with the Delaware Division of Corporations. By that time, this will officially register your LP and allow you to begin doing business in Delaware.
- Step 2: Designate a Registered Agent
Delaware LP formation requires that you designate a Registered Agent. So that is an individual or business entity that agrees to accept legal papers on behalf of your company.
Without a registered agent in Delaware, you risk losing your good standing, and the state has the authority to dissolve your LP if they so want. In the worst-case scenario, the state may fail to notify you of a lawsuit filed against your firm.
- Step 3: Obtain the Limited Partnership Certificate
To legalize your limited partnership, you need to file the Delaware Limited Partnership Certificate of Formation. The document is very simple to complete and simply needs the information shown below:
- The limited partnership’s name
- The limited partnership’s address
- Each general partnership’s name and mailing address
- Signature of an authorized person
Online PDF versions of the Certificate of Limited Partnership can be filled out and sent to the Delaware Division of Corporations via mail.
Processing Time: The Certificate of Limited Partnership document is not subject to a set processing period according to Delaware law.
- Step 4: Form a Limited Partnership Agreement
A Delaware Limited Partnership agreement describes some of the important company operating principles, even though the state does not legally require it of Delaware. It is a crucial document that outlines the specifics of the agreement between the general partners and limited partners, even if you are not required to submit it to the state in order to establish your limited partnership (LP).
Depending on your company’s size, industry, and other variables, the information contained in a limited partnership agreement can change. Generally speaking, it’s a good idea to document the following details:
- The period of your partnership (in years)
- Identities and roles of general and limited partners
- Initial capitalization and ongoing capital contributions
- Profit/loss distribution
- Structure of management
- Voting rights and meeting plans
- Accounting and record-keeping practices
- Conditions for transfer and dissolution
- Step 5: Handle Taxation Requirements
When you form a Delaware LP, you’ll need to handle the taxation requirements. Delaware has a corporate income tax, but LPs are exempt from this tax. However, you will still need to pay taxes on any profits that your LP earns.
Having 2 levels of taxation requirements: State level and Federal level.
- Step 6: Acquire Business Licenses and Permits
Through the state’s One Stop Business Registration and Licensing system, Delaware makes establishing your business’s licensing needs a simple procedure and can be done online.
What to do after forming a Delaware Limited Partnership?
- Open a business bank account
You’ll need to open a bank account to separate work from personal finance, and to make/receive payments. Unfortunately, bank account opening for non-US citizens is a rocky road to travel as most local banking institutions are still conservative in fear of potential money laundering or financial misconducts, so they tend to steer away from foreign applicants.
A better alternative is to just open an offshore bank account where the regulations play in your favor or you can even give neobanks a try if you need to register an account fast. Give our banking tool a try to find the right banking solution for your business
- Business insurance
You’ll need to carry workers’ compensation insurance and unemployment insurance in Delaware. General liability insurance is also required, as well as some industry-specific policies. The state’s One Stop Business Registration and Licensing system can help you find the right insurance for your business.
- Income reporting/Annual reporting
Limited Partnerships in Delaware do not file business tax returns. The income is instead distributed to the partners via the company entity, who then claim their proportionate share of gains or losses. Still, LPs do need to file an annual information return with the IRS for the year.
Limited Partnerships in Delaware, unlike in many other states, are not obliged to file any form of annual report in order to maintain good standing with the state.
Delaware is one of the most popular states in which to form a Limited Partnership (LP) because of offering many advantages to businesses, including a well-developed court system and favorable business laws.
If you have any questions about the process or want help setting up your company, feel free to send an email via firstname.lastname@example.org. We would be happy to assist you in any way we can.
Frequently Asked Questions
Delaware limited partnerships can have one or more partners. It must have at least two partners, but there is no maximum number of partners.
One key difference between LLCs and LPs is that an LLC offers limited liability protection for its members, while an LP does not. This means that if your company is sued, the members’ personal assets cannot be seized to pay off any judgments against the company.
Delaware LP does have legal personality. Limited partnerships are unique in that they have two levels of existence – the general partnership and the limited partnership. The limited partnership is a separate entity from its partners and can own property, enter into contracts, and sue or be sued.
Delaware Limited Partnerships offer more limited liability protection than Delaware LLCs. In the event that a lawsuit is filed against the partnership, the partners’ personal assets cannot be used to satisfy any judgment obtained against the business. This is not the case with LLCs – the owners of an LLC can be held liable for business debts and judgments.
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