Key Takeaways
- General partners manage and hold unlimited liability.
- Limited partners invest passively with capped liability.
- Pass-through taxation avoids entity-level taxes.
- LPs attract investors without losing management control.
What is Limited Partnership (LP)?
A limited partnership (LP) is a business structure featuring at least one general partner who manages daily operations with unlimited personal liability and one or more limited partners who invest capital but remain passive, limiting their liability to their investment.
This arrangement allows investors to contribute funds without engaging in management, protecting their personal assets beyond their share.
Key Characteristics
Limited partnerships combine active management and passive investment roles, defined by clear liability and governance rules:
- Ownership and Roles: General partners control operations, while limited partners stay passive to maintain limited liability.
- Liability: General partners face unlimited personal risk; limited partners risk only their contributed capital.
- Taxation: LPs use pass-through taxation, avoiding entity-level taxes and reporting income on individual returns.
- Governance: A limited partnership agreement specifies roles, profit sharing, and decision-making rights.
- Capital Raising: LPs attract investors seeking passive income without management responsibility.
How It Works
In a limited partnership, general partners manage the business and bear full liability, while limited partners provide funding but do not participate in daily decisions to preserve their limited liability status. This structure is ideal for ventures needing capital infusion without diluting management control.
Formation requires filing a Certificate of Limited Partnership and drafting a detailed partnership agreement. Maintaining role separation is critical for liability protection, and compliance with state laws, like those outlined by the SEC or state authorities, is essential to operate legally.
Examples and Use Cases
Limited partnerships are commonly used in industries requiring significant capital but centralized management:
- Real Estate: Large projects utilize LPs for funding while a general partner manages properties; see real estate investment trusts and partnerships in real estate.
- Commercial Properties: Companies like Crown Castle and Federal Realty use LP structures to optimize investor involvement and management control.
- Leveraged Buyouts: LPs frequently form the backbone of leveraged buyout funds, combining investor capital with active management expertise.
Important Considerations
When evaluating a limited partnership, understand that general partners hold full liability and operational responsibility, which may expose personal assets. Limited partners must avoid active participation to maintain their limited liability status.
Consult legal and tax professionals to ensure compliance with specific state laws and tax reporting requirements, as well as to draft a robust limited partnership agreement. For example, firms like Prologis demonstrate how effective LP governance supports large-scale investment success.
Final Words
Limited partnerships offer a clear division between management control and investor liability, making them ideal for passive investors seeking limited risk. Consider consulting a legal or financial advisor to draft or review your limited partnership agreement to ensure roles and liabilities are properly defined.
Frequently Asked Questions
A Limited Partnership (LP) is a business structure with at least one general partner who manages the business and bears unlimited liability, and one or more limited partners who invest capital but have liability limited to their investment.
General partners handle day-to-day management and take on unlimited personal liability, while limited partners act as passive investors with liability limited to their contributed capital and typically cannot participate in management.
General partners have unlimited personal liability for the partnership’s debts and obligations, whereas limited partners are only liable up to the amount they invested, protecting their personal assets beyond that.
An LP is a pass-through entity, meaning the partnership itself isn’t taxed; instead, profits and losses pass through to partners’ individual tax returns, avoiding double taxation.
The Limited Partnership Agreement outlines ownership shares, profit distribution, responsibilities, and exit terms, helping to govern the partnership clearly and prevent disputes, even though it may not always be legally required.
LPs allow passive investors to contribute capital with limited liability while giving general partners full control of management; they also enjoy pass-through taxation and simpler setup compared to corporations.
General partners face unlimited personal liability, limited partners cannot actively manage without losing their liability protection, and transferring LP interests often requires consent, which can limit liquidity.
To form an LP, you file the necessary documents with your state, often choosing investor-friendly jurisdictions like Delaware, and draft a Limited Partnership Agreement to define the partnership’s terms.
