LP

A Limited Partnership (LP) is a type of business entity with two types of partners: general partners, who manage the business and hold liability for debts, and limited partners, who invest capital but aren’t involved in daily operations and have liability only up to the amount they invested. This structure is often used in businesses where passive investors want to contribute financially but not actively manage the company.

An LP is a helpful structure for businesses that need substantial capital and can attract passive investors. It offers some partners a way to earn returns without daily involvement, while other partners enjoy full control but take on greater risk. However, a detailed partnership agreement is essential to ensure all partners understand their roles, rights, and responsibilities.

• Types of Partners: LPs include two types: general partners, who handle management and have unlimited liability, and limited partners, who are passive investors and have limited liability responsibility up to their investment.
• Common Uses: LPs are used in real estate, finance, and industries requiring significant capital.

A limited partnership (LP) is a unique business structure with a clear division between partners who actively manage the business and those who are primarily financial backers.

• General Partners (GPs) take on the operational side of the business, making day-to-day decisions and bearing full responsibility (unlimited liability) for any debts, losses, or legal issues.
• Limited Partners (LPs), sometimes called “silent partners,” contribute funds but don’t engage in management, operations, or decision-making. They enjoy limited liability, meaning they can only lose the amount they’ve invested, protecting them from additional financial risk if the business runs into problems.

Key Features of an LP

1. Division of Roles and Liability:
   • General partners handle all aspects of business operations and are entirely liable for the business’s debts.
   • Limited partners act as passive investors, enjoying limited liability and protection from personal risk beyond their initial investment.
2. Business Structure:
   • An LP’s structure allows limited partners to provide capital without the need for direct involvement.
   • General partners are incentivized to work actively, as they usually receive a management fee or share of profits.
3. Investment and Profit Distribution:
   • Limited partnerships often distribute profits and losses based on the amount each partner invested or as per the partnership agreement.
   • Since general partners carry a higher risk due to unlimited liability, they may receive a larger share of profits in return for their active role.

How to Form a Limited Partnership

1. Choose Partners: Identify who will serve as general and limited partners based on their roles, responsibilities, and liability preferences.
2. File a Certificate of Limited Partnership: This form and a fee are filed with the Secretary of State (SoS) to create the LP officially.
3. Draft a Partnership Agreement: In a legally binding agreement, define each partner’s role, contribution, profit-sharing, and exit conditions.
4. Maintain Compliance: Submit annual reports and fees as necessary with the SoS.

Review our Startup Cost tool to learn about the fees and formation instructions for starting a limited partnership in your state.

Examples of Limited Partnerships

1. Real Estate Investment:
   • LPs are commonly used in real estate where limited partners provide funding for property acquisition while general partners manage the project.
2. Venture Capital:
   • Many venture capital funds operate as LPs, with investors acting as limited partners and professional managers as general partners.
3. Private Equity:
   • Private equity funds often follow an LP structure, allowing general partners to invest and manage assets, while limited partners act as financial backers.

Legal and Tax Implications

1. Pass-Through Taxation:
   • An LP doesn’t pay federal income tax at the entity level. Instead, profits and losses pass through to each partner’s tax return, making it a “pass-through” entity.
2. Filing Requirements:
   • General partners file Schedule K-1 forms to report each partner’s share of the business’s income, deductions, and credits.
3. Self-Employment Taxes:
   • General partners pay self-employment taxes on their share of income, while limited partners typically don’t.