What is a sponsor?
A sponsor is a co-owner of a business whose liability for the company’s debts cannot exceed the amount that an individual has invested in the business. Sponsors are often called silent partners.
A limited partner invests money in shares in the partnership but has limited voting rights in the affairs of the partnership and no daily involvement in the business.
A sponsor can only become personally liable if it is proven that he has played an active role in the business.
How a Sponsor Works
By definition, a limited partnership (LP) has at least one general partner and at least one limited partner. The general partner (s) manage the business from day to day.
Although state laws vary, a general partner generally does not have full voting rights over the activities of a general partner. The IRS therefore considers the income of the company’s sponsor as passive income. A sponsor who participates in a partnership for more than 500 hours per year may be considered a general partner.
Some states allow sponsors to vote on matters that affect the basic structure or the sustainability of the partnership. These issues include the removal of general partners, the termination of the partnership, the modification of the partnership agreement, or the sale of most or all of the assets of the business.
Liability of general partners
A general partner is generally remunerated for controlling the day-to-day operations of the business and making day-to-day decisions. As a business decision maker, the general partner can be held personally liable for any commercial debt.
A limited partner purchased shares of the partnership as an investment, but is not involved in its day-to-day operations. Limited partners cannot enter into obligations on behalf of the company, participate in daily operations or manage the operation.
Because the sponsors do not manage the business, they are not personally liable for the debts of the partnership. A creditor may initiate legal action for repayment of the partnership’s debt from the personal assets of the general partner.
A limited partner can only become personally liable if it is proven that he has assumed an active role in the business by assuming the functions of general partner.
The loss of a sponsor of the company’s activities cannot exceed the amount of the person’s investment.
Tax treatment of sponsors
Limited partnerships (LP), like general partnerships, are intermediate or intermediate entities. This means that all partners are responsible for taxes on their share of the company’s income, rather than the company itself.
However, sponsors do not pay self-employment tax. Because they are not active in the business, the IRS does not consider the income of sponsors as earned income. The income received is passive income. The Taxpayer Relief Act of 1986 allows limited partners to compensate for losses reported from passive income.
Key points to remember
- A sponsor, also known as a silent partner, is an investor, not a daily manager of the business.
- The sponsor’s liability cannot exceed the amount that a person has invested in the business.
- A limited partnership, by definition, has at least one general partner and one limited partner.