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Overview of Limited Partnership (LP)
Definition of
Limited Partnership (LP)
What is a Limited Partnership (LP)? A Limited Partnership (LP) is a form of partnership business structure that includes at least one general partner and one or more limited partners. The general partner(s) are responsible for the day-to-day management of the business and have unlimited personal liability for the partnership's debts and obligations. In contrast, limited partners contribute capital to the business but generally do not participate in its management and have limited liability, meaning their personal liability for business debts is typically restricted to the amount of their investment in the partnership.
Activities Related to
Limited Partnership (LP)
Here is a list of LP related activities:Â
Drafting a limited partnership agreement detailing the roles, capital contributions, profit/loss sharing, and liability of general and limited partners, Filing a certificate of limited partnership with the state, General partners managing the daily operations of the business, Limited partners providing capital investment without active management, Distributing profits and allocating losses according to the partnership agreement, and Ensuring tax compliance (LPs typically have pass-through taxation).
These activities define the structure and operation of an LP.
The Importance of
a Limited Partnership (LP)
A Limited Partnership (LP) is important as it provides a structure for businesses to raise capital from investors (limited partners) who want limited liability and are not involved in management, while still allowing for operational control by the general partner(s). This structure is often favored for real estate ventures, investment funds (like private equity or venture capital funds), and family businesses where some members want to invest without taking on management duties or full personal liability. It allows for a clear distinction of roles, responsibilities, and risk exposure among partners.
Key Aspects of
Limited Partnership (LP)
Two Classes of Partners
Requires at least one general partner (manages operations, unlimited liability) and one or more limited partners (investors, limited liability, no management role).
Liability Differences
General partners face unlimited personal liability for business debts, while limited partners' liability is typically capped at their investment amount.
Management Control
Day-to-day management is handled by the general partner(s); limited partners usually cannot participate in management without risking their limited liability status.
Pass-Through Taxation
Like general partnerships, LPs typically do not pay entity-level income tax; profits and losses are passed through to the partners.
Concepts Related to
Limited Partnership (LP)
A Limited Partnership (LP) is a distinct business structure. It contrasts with a general partnership where all partners typically share in management and have unlimited liability. It also differs from a Limited Liability Partnership (LLP), which is often used by professionals and offers different liability protections, and a Limited Liability Company (LLC) which provides limited liability to all its members. Understanding these business structures is key for tax compliance and legal considerations.
LP
in Action:
The Adventures of Coco and Cami
Coco wants to expand her sandwich shop and needs investors, but her investors don't want to be involved in running the day-to-day business or risk more than their investment.
Professor A explains how a Limited Partnership (LP) structure could work, with Coco as the general partner managing the shop and her investors as limited partners with limited liability.