What Is a Limited Partnership (LP)?
A limited partnership (LP)—not to be confused with a limited liability partnership—exists when two or more partners unite to conduct a business in which one or more of the partners is liable only up to the amount of their investment. Limited partners do not receive dividends but enjoy direct access to the flow of income and expenses. The main advantage of this structure is that owners are typically not liable for the company's debts.
Understanding Limited Partnerships
Generally, a partnership is a business 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 also share similar features.
Limited Partnerships Versus Other Forms of Partnerships
In all forms of partnerships, each partner must contribute resources such as property, money, skills, or labor to share in the business's profits and losses. At least one partner takes part in making decisions regarding the business's day-to-day affairs.
All partnerships should have an agreement that specifies how to make business decisions. These decisions include how to split profits or losses, resolve conflicts, and alter ownership structure, and how to close the business, if necessary.
[Important: A limited partnership differs from other partnerships in that partners can have limited liability, meaning they are not liable for business debts that exceed their initial investment.]
Limited Partnerships, General Partnerships, and Joint Ventures
A general partnership is when all partners share in the profits, managerial responsibilities, and liability for debts equally. If the partners plan to share profits or losses unequally, they should document this in a legal partnership agreement to avoid future disputes.
A joint venture is a general partnership that remains valid until the completion of a project or a certain period elapses. All partners have an equal right to control the business and share in any profits or losses. They also have a fiduciary responsibility to act in the best interests of other members as well as the venture.
A limited partnership differs from other partnerships in that partners can have limited liability, meaning they are not liable for business debts that exceed their initial investment. In a limited liability company, general partners are responsible for the daily management of the limited partnership and are liable for the company's financial obligations, including debts and litigation. Other contributors, known as limited or silent partners, provide capital but cannot make managerial decisions and are not responsible for any debts beyond their initial investment.
Special Considerations: The Formation of a Limited Partnership
Almost all U.S. states govern the formation of limited partnerships under the Uniform Limited Partnership Act, which was originally introduced in 1916 and has since been amended multiple times. The most recent revision was in 2001. The majority of the United States—49 states and the District of Columbia—has adopted these provisions with Louisiana as the sole exception.
To form a limited partnership, 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 all local, state, and federal permits and licenses necessary to start a business.
- A limited partnership exists when two or more partners unite to conduct a business in which one or more of the partners is liable only up to the amount of their investment.
- There are three types of partnerships: limited partnership, general partnership, and joint venture.
- Most U.S. states govern the formation of limited partnerships.