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What is a Limited Partnership?

A Limited Partnership (LP) is a type of business entity that can be used for many purposes, including asset protection. LPs are structured differently than limited liability companies (LLCs), corporations and other business structures.

Types of Partners in a Limited Partnership

There are two types of partners in a Limited Partnership: A general partner, who assumes all the legal liability in the partnership, and one or more limited partners, who have no legal liability. This is laid out by statute, which is better than if the protection was solely in an operating agreement. 

The general partner is responsible for the management of the business and all business decisions. In other words, a general partner  manages a LP the same way a manager manages an LLC. The limited partner is allowed to invest in the business but has no control over running it.

Why Should I Use a Limited Partnership?

There are several reasons why a LP is an ideal structure for asset protection. These include:

  • A limited partner has no liability. The general partner takes all the risk.
  • A Limited Partnership offers several benefits to the limited partner, including: (a) family harmony and centralized control of assets during the client’s lifetime and after their death, (b) a foundation for present and future gifting to lower a client’s taxable estate, and (c) protects a client’s assets during their lifetime and after death.
  • Limited Partnerships have been in existence much longer than LLCs (1822 vs. 1977). There are many different types of LLCs, whereas there is no variation in Limited Partnerships. Due to this regularity, it is much more certain how a court will interpret a LP agreement.

6 Reasons Why Arizona is the Best State to Create a Limited Partnership

There are many advantages to creating an LP in Arizona rather than in any other state. 

1. Additional Privacy

Arizona does not disclose its limited partners, only the general partner, providing the client with privacy. For additional privacy, the client can use a Wyoming LLC as the general partner due to Wyoming’s privacy protections. (Wyoming does not disclose the members or managers of an LLC.)

2. Minimal Maintenance and No Risk of Accidental Dissolution. 

In Arizona, once an LP is created, it is a perpetual entity, with no need for renewals. Arizona also does not require either an annual report or tax filing. This reduces filing fees and avoids penalties for failure to file an annual report. Further, Skabelund PLLC serves as a statutory agent for our clients at no cost. In other words, there are no annual fees to maintain an Arizona LP, unlike other states. It typically costs $250 or more per year in other states to maintain a LP and pay the registered agent. This savings means that our LP’s are less expensive than elsewhere.

3. Greater Flexibility

In Arizona, Limited Partnerships are part of the statutory law, including A.R.S. 29-333, which provides greater flexibility if the limited partnership is attacked.

4. Only One Remedy for a Creditor – a Charging Order

In Arizona, a charging order is the sole remedy for a creditor to use against an LP. When a client owes money, the creditor must ask for a judgment in a court of law. When the judgment is granted, and a charging order issued, the creditor may divert any funds coming from the debtor to themselves until the debt is paid. In other words, a plaintiff may request the court direct distributions from the LP to the plaintiff. However, the plaintiff or creditor has no control of the partnership and may not make management decisions or sell the partnership’s assets to satisfy the debt. Further, a plaintiff has no power to order the general partner to make distributions to the partners of the LP.  This contrasts with LLCs, where judges have allowed creditors to take a client’s membership interest in the LLC or pierce the corporate veil and seize assets.

5. Arizona LP’s Work in Tandem with a Bridge Trust™*

Under A.R.S. 29-333, a limited partner is allowed to withdraw from the limited partnership “upon the occurrence of a predefined event.” This is unique to Arizona and allows “disconnection” of an asset protection trust from the limited partnership in a time of duress. The limited partner can unilaterally withdraw, without involving the general partner. In plain English, if the limited partner is a Bridge Trust™, the foreign trustee has the ability to move assets offshore from the limited partnership.

6. A LP is Stronger Due to Its Tax Status

Unlike an LLC, a LP can never be considered a disregarded entity. A disregarded entity is a single-owner business entity that the IRS disregards for income tax purposes. This means that the owner of the company must pay the business’ taxes on their personal return. 

Judges have allowed corporate veil piercing of disregarded LLCs because it lacked a partner to protect. (Remember, LLCs are partnerships by statutory definition and without a partner can be subject to attack.) Since the limited partners in an LP are not in a position of management, judges almost never consider limited partnerships as disregarded entities. It is for this reason that the general partner and limited partner of a LP should never be the same. Although this is not a specific advantage of an Arizona LP, it is an advantage over LLCs.

Get Skabelund’s Help with a Limited Partnership

A LP is one of several tools Skabelund PLLC uses to protect our client’s assets, centralize control and family harmony over assets and create a foundation to eliminate a client’s Federal Estate Tax. 

Unfortunately, LPs are complicated and frequently structured improperly for asset protection. It is also important to evaluate the investment of a LP with the value of the assets needing protection. 

At Skabelund PLLC, we educate our clients on the advantages and disadvantages of all of their options, including LPs. A LP is a great fit for some clients, but not for others. However, every experienced attorney specializing in asset protection recognizes that every tool at our disposal similarly may not be a good fit for a client’s goals and assets. 

This is why we believe it is critical that our clients have a plan specifically created for them rather than a cookie cutter one-size-fits-all approach too many lawyers offer.  

No matter where you live in the United States, we can help you. Allow us to share how asset protection works, create a custom-tailored asset protection plan for you, and answer all your questions with a no obligation 90-minute consultation. 

You can book an appointment, or call us at 480-323-9100.

*Bridge Trust is a trademark owned by Lodmell & Lodmell.

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