What Is a Limited Partnership (LP)?
A limited partnership (LP)—not to be confused with a limited liability partnership (LLP)—is a partnership made up of two or more partners. The general partner oversees and runs the business while limited partners do not partake in managing the business. However, the general partner of a limited partnership has unlimited liability for the debt, and any limited partners have limited liability up to the amount of their investment.
- A limited partnership (LP) exists when two or more partners go into business together, but the limited partners are only liable up to the amount of their investment.
- An LP is defined as having limited partners and a general partner, which has unlimited liability.
- LPs are pass-through entities that offer little to no reporting requirements.
- There are three types of partnerships: limited partnership, general partnership, and limited liability partnership.
- Most U.S. states govern the formation of limited partnerships, requiring registration with the Secretary of State.
Understanding Limited Partnerships (LPs)
A limited partnership is required to have both general partners and limited partners. General partners have unlimited liability and have full management control of the business. Limited partners have little to no involvement in management, but also have liability that's limited to their investment amount in the LP.
Partnership agreements should be created to outline the specific responsibilities and rights of both general and limited partners.
Types of Partnerships
Generally, a partnership is a business where two or more individuals have ownership. There are three forms of partnerships: limited partnership, general partnership, and limited liability partnership. The three forms differ in various aspects, but also share similar features.
In all forms of partnerships, each partner must contribute resources such as property, money, skills, or labor to share in the business' profits and losses. At least one partner takes part in making decisions regarding the business' day-to-day affairs.
All partnerships should have an agreement that specifies how to make business decisions. These decisions include how to split profits or losses, resolve conflicts, and alter ownership structure, and how to close the business, if necessary.
Limited Partnership (LP)
A limited partnership is usually a type of investment partnership, often used as investment vehicles for investing in such assets as real estate. LPs differ from other partnerships in that partners can have limited liability, meaning they are not liable for business debts that exceed their initial investment.
General partners are responsible for the daily management of the limited partnership and are liable for the company's financial obligations, including debts and litigation. Other contributors, known as limited (or silent) partners, provide capital but cannot make managerial decisions and are not responsible for any debts beyond their initial investment.
Limited partners can become personally liable if they take a more active role in the LP.
General Partnership (GP)
A general partnership is a partnership when all partners share in the profits, managerial responsibilities, and liability for debts equally. If the partners plan to share profits or losses unequally, they should document this in a legal partnership agreement to avoid future disputes.
A joint venture is often a type of general partnership that remains valid until the completion of a project or a certain period passes. All partners have an equal right to control the business and share in any profits or losses. They also have a fiduciary responsibility to act in the best interests of other members as well as the venture.
Limited Liability Partnership (LLP)
A limited liability partnership (LLP) is a type of partnership where all partners have limited liability. All partners can also partake in management activities. This is unlike a limited partnership, where at least one general partner must have unlimited liability and limited partners cannot be part of management.
LLPs are often used for structuring professional services companies, such as law and accounting firms. However, LLP partners are not responsible for the misconduct or negligence of other partners.
Almost all U.S. states govern the formation of limited partnerships under the Uniform Limited Partnership Act, which was originally introduced in 1916 and has since been amended multiple times. The most recent revision was in 2013. The majority of the United States—49 states and the District of Columbia—have adopted these provisions with Louisiana as the sole exception.
To form a limited partnership, partners must register the venture in the applicable state, typically through the office of the local Secretary of State. It is important to obtain all relevant business permits and licenses, which vary based on locality, state, or industry. The U.S. Small Business Administration (SBA) lists all local, state, and federal permits and licenses necessary to start a business.
Note that in music, LP means long-playing, which is another word for an album. An LP is longer than a single or extended play (EP) album. It was originally used to describe longer-length vinyl albums. However, it’s now also used to describe CDs and digital music albums.
Advantages and Disadvantages of a Limited Partnership (LP)
The key advantage to an LP, at least for limited partners, is that their personal liability is limited. They are only responsible for the amount invested in the LP. These entities can be used by GPs when looking to raise capital for investment. Many hedge funds and real estate investment partnerships are set up as LPs.
Limited partners also don't have to pay self-employment taxes. LPs are pass-through entities, meaning the entity files a Form 1065, and then partners receive Schedule K-1s that they use to include their portion of the income or loss on their own personal tax returns.
On the downside, LPs require that the general partner have unlimited liability. They are responsible for 100% of management control but also are on the hook for any debts or mishandling of business dealings. As well, limited partners are only allowed limited involvement in operations. If their role is deemed non-passive, they lose personal liability protection.
Personal liability protection for limited partners
Pass-through entity for taxation (i.e. only taxed once unlike C-corp)
Ease of creation and reporting (e.g. no required annual meetings)
Less formal structure
No self-employment taxes for limited partners
GPs have unlimited personal liability (although they also have management control of the LP)
Limited partners limited in management participation
Ownership can be harder to transfer than other entities, such as an LLC
Not as flexible for changing management roles
Limited Partnership (LP) FAQs
What Is a Limited Partnership (LP) in Business?
Businesses that form a limited partnership generally do so to own or operate a set of specific assets, such as a real estate investment partnership or LP for managing oil pipelines. One party (the general partner) has control over the assets and management responsibilities, but also are personally liable. The other party (limited partners) are generally investors whose personal liability is limited to their investment.
What Is the Difference Between an LLC and a Limited Partnership?
Both LLCs and LPs offer flexibility in structuring responsibilities, profit-split, and taxes. An LP allows certain investors (limited partners) to invest without having a management role or any personal liability, while the general partners carry all the liability. With an LLC, the owners can shield themselves from personal liability, but all generally have management roles. An LP must have at least one limited partner.
LLCs also have greater flexibility for tax reporting. Often, the general partner of an LP will be structured as an LLC to help provide personal liability protection, as LLC managers are typically not held personally responsible for the businesses’ liabilities.
What Is the Difference Between an LP and LLP?
An LP and LLP have a similar structure. However, LPs have general partners and limited partners, while LLPs have no general partners. All partners in an LLP have limited liability.
What Is Limited Partnership Taxation?
Limited partnerships are taxed as pass-through entities, meaning each partner receives a Schedule K-1 which they include on their personal tax return.
What Are the Benefits of a Limited Partnership?
Limited partnerships are ideal entities for raising capital for a particular investment or set of assets. They allow limited partners to invest while keeping their liability limited.
The Bottom Line
Limited partnerships are generally used by hedge funds and investment partnerships as they offer the ability to raise capital without giving up control. Limited partners invest in an LP and have little to no control over the management of the entity, but their liability is limited to their personal investment. Meanwhile, general partners manage and run the LP, but their liability is unlimited.