For the GP/LP (general partner/limited partner) structure, what are the limited partnership pros and cons for investors. As an avid real estate investor and enthusiast, I understand the importance of making informed decisions when it comes to structuring your investments. So, if you’re curious about the advantages and disadvantages that limited partnerships can offer, grab a cup of coffee, settle in, and let’s explore the world of LPs together.
Video Transcript: GP/LP pros and cons for founders
In terms of the pros and cons, or advantages and disadvantages, of using the GP/LP structure, investors are often looking to the flow- through capability or capacity of the limited partnership.
I’m George Dube, saving the world from tax one bow tie at a time.
This flow-through ability kind of in English means that the activity of the limited partnership is flowed out to the investors proportionately, typically based on the amount of funds that they invest. Phrased a little differently, if there’s a real estate investment project in terms of simply a rental program, that rental income, less the various expenses, are going to be flowed through to the investors as if they were doing that themselves on their tax returns. Whereas, if it was a development project, perhaps the sale of a condo project, the investors will receive, again, a proportionate amount of the activity, the sales of those units, as if they sold them themselves.
Often, because the limited partnership does not actually pay any income taxes, the investors like it because they can dictate for themselves how they are taxed. In other words, if they invest as individuals, corporations, perhaps as another partnership. They may have family trusts involved. They may have a joint venture involved. They can do different things. And that will dictate, to a large degree, how they are taxed. What makes sense in their specific situation. In contrast to the common example of setting a project up in a corporation where everyone then who is investing must accept the tax implications of that corporate investment.
Other common reasons for using the limited partnership, making clear I’m certainly not a lawyer, but I understand that there is limited liability in many cases for those investors.
Further, from a financing perspective, in the vast majority of cases, the limited partners will not be providing a guarantee for the project financing. Which, again, is often in contrast to investing using a corporation.
If you want to learn more about this topic, check out our GP/LP playlist. Or head over to my website georgeEdube.com.
No question, this series of recordings on the GP/LP structuring, very high level, not a lot of detail. Please feel free to reach out, set up a time to talk further and we can get into the nuts and bolts for what’s right in your specific situation.
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Resources
For additional resources related to the GP/LP pros and cons for founders, please see:
- What is a GP/LP structure?
- GP/LP structure growth: Simple to complex
- How to set up a GP/LP structure
- Who should set up a GP/LP structure?
- GP/LP tax benefits for founders
Back to: GP/LP structure: Ultimate guide for Canadian real estate investors
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Remember – circumstances are unique! This information is summary in nature. Seek out advice from your tax advisor about your specific situation.
