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What is a Limited Partnership?
A Limited Partnership (LP) is a business structure that includes at least one general partner who manages the business and assumes full liability, and one or more limited partners whose liability is restricted to the amount they have invested.
Definition
A Limited Partnership is a legal business arrangement in which general partners manage operations and bear unlimited liability, while limited partners contribute capital with liability limited to their investment.
Key Takeaways
- Combines active management with passive investment.
- Limited partners enjoy liability protection.
- Common in investment funds, real estate, and private equity.
Understanding Limited Partnerships
Limited partnerships are designed to attract investors who want exposure to a business without day-to-day involvement. The general partner (GP) runs the business, makes strategic decisions, and carries full legal responsibility for debts and obligations.
Limited partners (LPs) contribute capital and share in profits but do not participate in management. If they do, they may lose their limited liability protection. This clear separation of roles makes LPs popular for capital-intensive ventures.
Because of their structure, limited partnerships are often used in private equity funds, venture capital funds, and property development projects.
Formula (If Applicable)
There is no formal formula, but profit distribution typically follows:
- Profit Allocation: Based on partnership agreement percentages
- Capital Contribution: Amount invested by each partner
- Return Structure: Preferred returns + profit split (if applicable)
Real-World Example
- A real estate development LP where developers act as general partners and investors as limited partners.
- Private equity funds structured as LPs, with the fund manager as the GP and institutional investors as LPs.
- Family investment partnerships where one member manages assets on behalf of others.
Importance in Business or Economics
Limited partnerships matter because they:
- Enable capital pooling without shared management.
- Reduce risk for passive investors.
- Support large-scale investment projects.
- Encourage entrepreneurship by separating control and capital.
Types or Variations
- Traditional Limited Partnership (LP): Clear GP–LP separation.
- Limited Liability Limited Partnership (LLLP): GPs also receive liability protection (in some jurisdictions).
Related Terms
- General Partnership
- Limited Liability Company (LLC)
- Private Equity Fund
Sources and Further Reading
- Investopedia – Overview of limited partnerships and partner roles.
- U.S. Small Business Administration (SBA) – Business structure comparisons.
- OECD – Corporate governance and partnership frameworks.
Quick Reference
- General Partner: Manages business, unlimited liability.
- Limited Partner: Passive investor, limited liability.
- Best For: Investment vehicles and capital-heavy ventures.
Frequently Asked Questions (FAQs)
Can limited partners help manage the business?
No. Active management may remove their liability protection.
Who is liable for partnership debts?
Who is liable for partnership debts?
The general partner is fully liable; limited partners are not beyond their investment.
How is a limited partnership taxed?
Typically through pass-through taxation, with profits taxed at the partner level.
