Loading the player...

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.

  1. Articles of Partnership

    Articles of partnership is a contract that forms an agreement ...
  2. General Partnership

    A general partnership is an arrangement by which two or more ...
  3. Limited Partner

    A partner in a partnership whose liability is limited to the ...
  4. Subscription Agreement

    An application by an investor to join a limited partnership. ...
  5. Schedule K-1

    A tax document used to report the incomes, losses and dividends ...
  6. IRS Publication 541

    A document published by the Internal Revenue Service (IRS) that ...
Related Articles
  1. Small Business

    MLPs and Limited Partnerships: How They Differ

    Limited partnerships and master limited partnerships have one difference that makes all the difference.
  2. Taxes

    What's the Purpose of IRS Form 1065?

    Business partners need the information on this form to complete their own tax returns. Here are the details.
  3. Insights

    Limited Liability Partnership (LLP): The Basics

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

    4 Business Partnership Mistakes To Avoid

    When two or more people get together to run a business, the odds of conflict and financial risk increase without the proper controls in place.
  5. Small Business

    Using Life Insurance as a Business Succession Plan

    Life insurance can be a good succession plan tool for business partnerships.
  6. Financial Advisor

    How Master Limited Partnerships are Taxed

    MLPs are a different animal when it comes to taxes. Here's how they work.
  7. Small Business

    Which Type of Organization Is Best For Your Business?

    Learn the differences between the types of business organizations so you can determine how to best structure your business for tax and liability limitations.
  8. Taxes

    How Private Equity and Hedge Funds are Taxed

    Private equity and hedge funds offer an appealing tax structure for those who can afford to invest in them. Here's why.
  9. Managing Wealth

    Protect Your Personal Assets

    A family limited partnership (FLP) can go a long way toward securing your family's property.
  10. Investing

    What is Carried Interest?

    Carried interest is the percentage of a private equity or a hedge fund’s profits that its general partners receive as compensation.
  1. What's the difference between limited, general and joint venture partnerships?

    Learn the differences between general partnerships, limited liability partnerships, limited partnerships and joint venture ... Read Answer >>
  2. Which terms should be included in a partnership agreement?

    Understand what specific terms should be included in a business partnership agreement and how each affects the partners in ... Read Answer >>
  3. 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 >>
  4. Do joint ventures need an exit strategy?

    Understand why an exit strategy is important for a business partnership such as a joint venture, and learn the options partners ... Read Answer >>
Hot Definitions
  1. Liquidity

    Liquidity is the degree to which an asset or security can be quickly bought or sold in the market without affecting the asset's ...
  2. Federal Funds Rate

    The federal funds rate is the interest rate at which a depository institution lends funds maintained at the Federal Reserve ...
  3. Call Option

    An agreement that gives an investor the right (but not the obligation) to buy a stock, bond, commodity, or other instrument ...
  4. Standard Deviation

    A measure of the dispersion of a set of data from its mean, calculated as the square root of the variance. The more spread ...
  5. Entrepreneur

    An entrepreneur is an individual who founds and runs a small business and assumes all the risk and reward of the venture.
  6. Money Market

    The money market is a segment of the financial market in which financial instruments with high liquidity and very short maturities ...
Trading Center