Limited Partnership

A limited partnership (LP) is a partnership comprised of both limited partners and general partners. LPs are often useful in situations where some partners want to invest passively, and allow the other partners to actively manage the LP’s operations.

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The Good. Limited Partnership Pros

  • Limited liability for the limited partners
  • Often a suitable entity form for attracting passive investors
  • Management autonomy for general partners
  • Pass through taxation.

The Bad. Limited Partnership Cons

  • Unlimited liability for the general partners
  • Limited partners can lose limited liability protection if they take too active a role in the LP.

About Limited Partnerships


Limpted Partnership Basics.

An LLC is usually organized with the secretary of state (or its equivalent) in the state where it will operate. The owners, called members, have limited liability—that is, they are generally protected against personal responsibility for the debts and obligations of the LLC, much like shareholders of a corporation are shielded from liability for corporate debts. So if the LLC incurs a liability it cannot pay, its members generally will not be responsible for paying that debt.


Like a general partnership, a limited partnership (LP) is a business consisting of more than one owner. However, unlike a general partnership, an LP confers the benefit of limited liability on some of its partners. Specifically, the LP’s limited partners will normally be shielded from personal liability for the LP’s debts, as long as they do not participate in managing the company. Because limited partners are protected against liability for business debts, LPs are a commonly used where a company desires funding from investors who prefer not to be involved in company’s day to day affairs.


Structure.

An LP consists of one or more limited partners, along with one or more general partners. The limited partners (often known as silent partners) contribute capital to the LP, but do not take part in managing its affairs. The general partners, on the other hand, actively manage the LP’s business operations.


Limited partners enjoy limited liability protection as long as they do not take part in managing the LP’s affairs; if they step beyond this passive role, they risk losing that protection. Since limited partners are not involved in management, general partners enjoy autonomy in operating the LP as they see fit. However, general partners are subject to unlimited personal liability for the LP’s debts.


Taxation.

For tax purposes, LPs are treated similarly to general partnerships—the LP itself is not taxed on its income. Instead, the profits and losses are passed through to the partners, who then report their share of the LP’s income on their individual tax returns.


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