Limited Partnership (LP)

A limited partnership (LP) is a business structure with two classes of partners: at least one general partner who manages the business and assumes unlimited personal liability, and one or more limited partners who contribute capital but do not take part in daily management and whose liability is limited to their investment.

Key takeaways

• LPs require at least one general partner (managing, unlimited liability) and one limited partner (investing, limited liability).
• LPs are typically pass-through tax entities; partners report business income or losses on their personal tax returns.
• Limited partners must avoid participating in management to preserve limited liability.
• Formation requires state registration and usual business licenses; an EIN and separate bank account are recommended.

How an LP works

• Roles and liability
• General partner: runs the business, makes decisions, and is personally liable for business debts and obligations.
• Limited partner: provides capital, shares profits, and is liable only up to the amount invested—so long as they do not engage in management.
• Taxes
• LPs are usually pass-through entities. Profits and losses flow through to partners’ personal tax returns unless the partnership elects otherwise under applicable tax rules.
• Duration and transferability
• An LP can be formed for an ongoing enterprise or a limited-duration project. Transferring a partner’s interest often requires the consent of other partners and may be restricted by the partnership agreement.

Common uses

LPs are frequently used to pool capital for investments such as real estate, oil and gas ventures, private equity, or any situation where passive investors want limited exposure to risk while a general partner manages operations.

How to form a limited partnership

1. Choose the state where you will register the LP (consider tax and regulatory environment).
2. Select a unique business name that complies with state naming rules (often must include “Limited Partnership,” “LP,” or similar).
3. Draft a partnership agreement that specifies roles, capital contributions, profit allocation, decision-making authority, and exit/dissolution terms. Although typically not filed with the state, this document governs the relationship among partners.
4. File a Certificate of Limited Partnership (or equivalent) with the state’s Secretary of State. Filing requirements and fees vary by state.
5. Appoint a registered agent to receive legal and tax notices.
6. Obtain an Employer Identification Number (EIN) from the IRS for tax and banking purposes.
7. Secure any industry-specific licenses and permits required by federal, state, or local authorities.
8. Open a separate business bank account and maintain clear separation between partnership and personal finances.
9. Obtain appropriate business insurance to protect against operational risks.

Advantages

• Limited liability for passive investors (limited partners) up to their capital contribution.
• Clear division of management and capital roles; general partner controls operations.
• Simpler to form and maintain than many corporations.
• Pass-through taxation avoids double taxation at the entity level.

Disadvantages

• General partner bears unlimited personal liability unless they form a separate entity (e.g., an LP where the general partner is an LLC) to limit exposure.
• Limited partners generally cannot participate in management without risking their limited-liability status.
• Transferring ownership or changing partner roles can be complicated and often requires agreement from other partners.
• Potential conflicts between the active general partner and passive limited partners over strategy and risk.

LP vs. LLC vs. Corporation

Limited Partnership (LP)
* Structure: At least one general partner (manages, unlimited liability) and one or more limited partners (passive, limited liability).
* Management: General partner manages; limited partners do not.
* Taxation: Typically pass-through.

Limited Liability Company (LLC)
* Structure: Members can be active managers or passive investors; no required general partner.
* Management: Flexible—member-managed or manager-managed.
* Liability: Members generally have limited liability.
* Taxation: Can elect to be taxed as a pass-through entity, S corporation, or C corporation.

Corporation
* Structure: Shareholders own the company; board of directors oversees management.
* Management: Officers and managers run operations under board supervision.
* Liability: Shareholders have limited liability.
* Taxation: C corporations face entity-level taxation; S corporations provide pass-through taxation for eligible companies.

Practical considerations

• If the general partner is concerned about personal liability, they may form an entity (such as an LLC) to act as the general partner, which can provide an additional liability shield—subject to state law and tax consequences.
• Limited partners should carefully avoid activities that could be construed as management (e.g., signing checks, making binding decisions) to preserve limited liability.
• A clear, comprehensive partnership agreement reduces disputes by defining decision-making authority, capital calls, distributions, transfer restrictions, and exit procedures.

Conclusion

A limited partnership is a useful structure when active management by one party and passive capital from others makes sense—common in investment and project-based ventures. It balances management control and investor protection through limited liability, but requires careful drafting of the partnership agreement and attention to state filing rules and tax obligations.