Real estate investors have options when structuring their investments. We’ve been exploring those structures, from putting them into an LLC to forming a land trust. These and numerous other structures can provide a boost to your income, protect you from liability, allow you to manage separate properties more effectively, and more.
These are all true for a Limited Partnership (LP). LPs used to be one of the most common ways companies would raise money from investors, but the advent of the LLC entity structure has put Limited Partnerships on the backburner. There are some strong similarities between the two structures, but a few distinct and important differences show why more investors opt for LLCs today.
Cost Effectiveness
One of the differences steering investors clear of LPs is the exorbitant cost needed to form them. The structure and responsibilities within an LP are more formalized than that of an LLP, so the cost of finalizing this structure naturally goes up.
Florida’s official fees for LPs at the time of this writing include over $1,000 in initial costs along with a $500 annual reporting fee. These and other fees can stack up quickly in forming and managing an LP. The official fees for LLCs at the time of this writing are significantly less, coming in under $200 for initial costs and under $150 for annual reporting fees. The additional fees Florida charges for the formation and management of an LLP are also significantly lower than that of an LP.
Structure
For an LLC, there is no real delineation preventing or forcing any number of partners or owners. An LLC can have just one owner or as many as members would like. These partners can all share the same responsibilities in day-to-day operations as defined within the LLC’s operating agreement.
The same can’t be said for LPs – these require at least two owners and different partners will have different capabilities and protections. There must be at least one “general partner” who will be the primary owner and then at least one “limited partner.” There can be one or multiple of each. A general partner will be responsible for the day-to-day operations of the business while limited partners can only invest in the company while having no role in day-to-day operations. Limited partners still share the profits or losses of the company through their investments.
This more formalized structure within a limited partnership provides less flexibility than that of an LLC. The formalized structure can be limiting and makes it harder to quickly make changes within the organization when issues arise.
Liability Protection
Both LPs and LLCs provide liability protection to partners, though the protection doesn’t extend to each member of an LP. For LLCs, all owners are protected from personal liability should something happen on the property or properties held within the LLC. For LPs, however, only limited partners are afforded such protections. General partners can still face liability when litigation or other issues come up involving one of the properties.
Ultimately, there are several “limitations” that come with forming an LP for your real estate investments. While you may be able to attract more investors through an LP, the LLC allows more flexibility, protection, and costs far less up front and over time. At Bryant Taylor Law, we help clients each and every day create and manage their business structure for real estate investments. If you have real estate investments in Florida and want to form an LLC or reorganize the one you already have, call our offices.
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