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.

RELATED TERMS
  1. Partnership

    A partnership is a formal arrangement in which two or more parties ...
  2. General Partnership

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

    Owners of a partnership who have unlimited liability. A general ...
  4. Limited Partner

    A limited partner is a business partner whose liability is limited ...
  5. IRS Publication 541

    A document published by the Internal Revenue Service (IRS) that ...
  6. Uniform Partnership Act (UPA)

    The Uniform Partnership Act (UPA) provides governance for business ...
Related Articles
  1. 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.
  2. 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.
  3. Small Business

    Using Life Insurance as a Business Succession Plan

    Life insurance can be a good succession plan tool for business partnerships.
  4. 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.
  5. Managing Wealth

    Protect Your Personal Assets

    A family limited partnership (FLP) can go a long way toward securing your family's property.
  6. Small Business

    What is Unlimited Liability?

    Unlimited liability means that the owners of a business are liable for the entire amount of debt and obligations of that business.
  7. Insurance

    Tax Incentives for Biz Owners With LTC Insurance

    Tax deductions for long-term care insurance premiums are often overlooked by small business owners.
  8. Investing

    Brookfield Property Partners' Impressive Portfolio of Assets

    Brookfield Property Partners represents a unique opportunity to invest in commercial real estate markets at a discounted price.
  9. Investing

    Ferrellgas Partners CEO Departs After Dismal 2016

    Master limited partnership Ferrellgas Partners (NYSE: FGP) has a new -- but familiar -- person at its helm. The propane specialist announced that founder and Executive Chairman James Ferrell ...
RELATED FAQS
  1. 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 >>
  2. How are business decisions made in a partnership?

    Understand how partners in a business can tackle decision making, and learn the options available for partnerships to develop ... Read Answer >>
  3. What are the primary disadvantages of forming a joint venture?

    Learn the disadvantages to forming and maintaining a joint venture partnership, including factors business owners should ... Read Answer >>
Hot Definitions
  1. Bond

    A bond is a fixed income investment in which an investor loans money to an entity (corporate or governmental) that borrows ...
  2. Compound Annual Growth Rate - CAGR

    The Compound Annual Growth Rate (CAGR) is the mean annual growth rate of an investment over a specified period of time longer ...
  3. Net Present Value - NPV

    Net Present Value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows ...
  4. Price-Earnings Ratio - P/E Ratio

    The Price-to-Earnings Ratio or P/E ratio is a ratio for valuing a company that measures its current share price relative ...
  5. Internal Rate of Return - IRR

    Internal Rate of Return (IRR) is a metric used in capital budgeting to estimate the profitability of potential investments.
  6. Limit Order

    An order placed with a brokerage to buy or sell a set number of shares at a specified price or better.
Trading Center