What is a 'Limited Partner'

Also known as a silent partner, a limited partner is a business partner whose liability is limited to the amount of their investment in the company.  Because the limited partner is not a material participant in business operations, the IRS considers their income as passive income. A limited partner who participates in a partnership for more than 500 hours in a year may be viewed as a general partner.

BREAKING DOWN 'Limited Partner'

A limited partnership (LP) has at least one general partner and at least one limited partner. Some states allow limited partners to vote on issues affecting the basic structure of the partnership. Voting issues include removing general partners, terminating the partnership, amending the partnership agreement, or selling most, or all, of the company’s assets.

Liability for General and Limited Partners

A general partner typically receives payment for controlling the company’s daily operations and making legally binding decisions. A general partner is personally liable for business debts and legal proceedings. For example, if one general partner cannot pay a creditor’s debt, the creditor may collect from another general partner.

A limited partner invests capital in exchange for shares in the partnership. A limited partner has restricted interaction in the business's practices. As such they cannot incur obligations on behalf of the partnership, participate in daily operations, or manage the operations. For example, a limited partner may invest $100,000 in a real estate partnership but cannot engage in real estate transactions for the firm.

Because the limited partner does not control managing operations, they are not personally liable for the partnership's debts. For example, a creditor may seek recovery against the general partners' personally owned assets. However, claims against the limited partner's financial investment are truncated. Alternatively, a limited partner may become personally liable if they assume an active role in the business. To claim against the limited partner, the creditor must prove that they engaged in activities aligned with general partner duties. If it is confirmed, the limited partner may be fully liable for the creditor’s claims.

Tax Treatment for Limited Partners

Limited partnerships (LPs), similar to general partnerships, are pass-through or flow-through entities. Pass-through means each of the partners is responsible for taxes, rather than the business itself.  Although the IRS treats LPs like general partnerships where all partners individually report and pay taxes on their share of the profits, limited partners do not pay self-employment taxes. Because they are not active in the business, the IRS does not consider limited partners’ income as earned income. The income received is passive income.  The Taxpayer Relief Act of 1986 allows limited partners to offset reported losses from passive income.

  1. General Partner

    A general partner is an owner of a partnership who has unlimited ...
  2. General Partnership

    A general partnership is an arrangement by which two or more ...
  3. Schedule K-1

    A Schedule K-1 is a document used to describe incomes, losses ...
  4. Guaranteed Payments to Partners

    Guaranteed payments to partners are payments meant to compensate ...
  5. Carried Interest

    Carried interest is a share of any profits that the general partners ...
  6. Trading Partner Agreement

    A trading partner agreement is an agreement drawn up by two parties ...
Related Articles
  1. Insights

    Limited Liability Partnership (LLP): The Basics

    Limited liability partnerships (LLPs) are a flexible, legal and tax entity that allows partners to benefit from economies of scale while also reducing their liability.
  2. Small Business

    Should You Have A Business Partner?

    What are the advantages of having a business partner? What are the advantages of doing it yourself?
  3. Trading

    Asset protection for the business owner

    Learn about common asset-protection structures and which vehicles might work best to protect particular types of assets.
  4. Financial Advisor

    Partners Group: Investment Manager Highlight (PGHN)

    Get an inside look at some of the key executives and the investment approach of the global private equity investment firm Partners Group.
  5. Managing Wealth

    Key Questions to Ask Before Moving in Together

    Moving in together is a big step. Here are some key financial questions to ask your partner before you make the move.
  6. Financial Advisor

    How Advisors Can Help Junior Partners Flourish

    Hiring a junior partner can be beneficial to a financial planning practice. Here's how advisors can help a new hire flourish.
  7. Investing

    5 Stocks to Invest in the Decline of Oil Storage Capacity (MMP, EDP)

    Discover five stocks that may likely benefit from the decline of oil storage capacity, and learn about their core business operations.
  8. Investing

    Learn the Lingo of Private Equity Investing

    Because of the non-public nature of private equity, it can be difficult to the learn the lingo. We break it down here.
  9. Investing

    Energy Transfer Buys 65% PennTex Stake (ETP, ETE)

    Energy Transfer Partners acquired 65% of the limited partnership interests in PennTex Midstream Partners for $640 million in cash and stock.
  1. Limited, General vs Joint Venture Partnership

    Learn the differences between general partnerships, limited liability partnerships, limited partnerships and joint venture ... Read Answer >>
  2. What is the difference between a silent partner and a general partner?

    Understand the difference between a person designated as a silent partner and a general partner under the partnership business ... Read Answer >>
  3. What are the liabilities of a silent partner?

    Understand the position of a silent partner in a business, specifically how the liability of a silent partner is limited ... Read Answer >>
Trading Center