What is 'Limited Partnership - LP'
A limited partnership (LP) exists when two or more partners unite to jointly conduct a business in which one or more of the partners is liable only to the extent of the amount of money that partner has invested. Limited partners do not receive dividends, but enjoy direct access to the flow of income and expenses. This term is also referred to as a "limited liability partnership" (LLP). The main advantage to this structure is that the owners are typically not liable for the debts of the company.
BREAKING DOWN 'Limited Partnership - LP'
Generally, a partnership is a business that is owned by two or more individuals. There are three forms of partnerships: general partnership, joint venture and limited partnership. The three forms differ in various aspects, but they share similar features.
Similarities of Limited Partnership With Other Forms of Partnerships
In all forms of partnerships, each partner is required to contribute resources such as property, money, skill or labor in exchange for sharing in the profits and losses of the business. At least one partner is involved in making decisions regarding the day-to-day affairs of the business.
Though not a legal requirement, all partnerships require a partnership agreement that specifies how to make business decisions. These decisions include how to split profits or losses, resolve conflicts and alter ownership structure, as well as how to close the business, if necessary.
Differences Between Limited Partnership and Other Forms of Partnership
A general partnership is the one in which all profits, managerial responsibilities and liability for debts are shared in equal proportion among the partners. If they plan to share profits or losses unequally, this should be documented in a legal partnership agreement, to avoid future disputes. A joint venture is a form of general partnership that remains valid until a certain project is completed or a certain period elapses.
A limited partnership differs from other partnerships in that the partners are allowed to have limited liability. This means that partners are only liable for the business’ debts up to a certain limit. This limit depends on the individual partner’s investment contribution. A limited partnership venture is run by one or two partners known as general partner(s). Other contributors, known as limited or silent partners, provide capital but aren’t allowed to make managerial decisions.
Formation of Limited Partnership
Almost all U.S. states govern the formation of limited partnerships under the Uniform Limited Partnership Act, which was amended in 1985. It was originally known as the Limited Partnership Act, created in 1916 and adopted by 49 states, plus the District of Columbia.
To form a limited partnership, the partners must register the venture in the applicable state, typically through the office of the local Secretary of State. It is important to obtain all relevant business permits and licenses, which vary based on locality, state or industry. The U.S. Small Business Administration lists down all local, state and federal permits and licenses necessary to start a business.