What is a Limited Partnership for a Business?

Limited Partnership Compared to Other Partnership and LLC Types

What is a Limited Partnership?
••• Caiaimage/Caiaimage/Robert Daly/Getty Images

Partnerships come in different types - limited partnership, limited liability partnership, and general partnership. And then there are limited liability companies. In this article, we'll look at the details of what makes a limited partnership and compare it to other types of partnerships and the limited liability company. 

What is a Limited Partnership? 

A limited partnership is a type of partnership with both a general partner and limited partners. The limited partnership was a popular partner form in the 1970s and 1980s, before the advent of the limited liability company (LLC) and other types of businesses. It still has some advantages today

What are Some Examples of Limited Partnerships? 

LP's are often used for professional firms in which the professionals want to turn over management of the partnership to the general partner. 

Another common use of a limited partnership is in a family business - called a family limited partnership. Joshua Kennon, Beginning Investing Expert, says that families often pool their money, designate a general partner, and watch their investments (hopefully) grow. 

Limited partnerships are often formed as film production companies, to invest in real estate or other short-term projects. 

How a Limited Partnership Operates

There is one general partner, who is responsible for the day-to-day management of the partnership. The general partner is also fully liable for the debts and liabilities of the partnership, because of having complete management control.

The LP also has one or more limited partners. These individuals are sometimes called "silent partners," because they don't have to do anything except invest in the business to get a share of the profits. Limited partners have invested money in the partnership, but they don't participate in the management of the business. Their liability is limited to their investment in the partnership, like owners (members) in a limited liability company (LLC). 

How to Form a Limited Partnership

Like most businesses, you form your limited partnership by registering with your state. Your state may or may not allow limited partnership registration. Check with your state's secretary of state to see if this partnership option is available. 

In addition to the registration, you will need a partnership agreement that spells out all the "what if" questions and the responsibilities of the partners. The agreement also details how the profits of the partnership are divided among the partners.

How a Limited Partnership Pays Income Taxes

Partnerships are pass-through business entities; the income tax of the business is passed through to the individual partners. Like other types of partnerships, the income taxes of the partnership business are paid by the individual partners, according to their partnership share. This share, called a distributive share, is passed through to the owner's personal tax return, and income taxes are paid at the individual's personal tax rate. 

Advantages and Disadvantages to the Limited Partnership

The limited partnership has the same advantages as other types of partnerships with the option of limited partners; these partners can limit their liability while still participating in the growth of the business. Also, a limited partner who decides to participate in managing the business may find himself or herself liable for these management decisions. 

The major disadvantage to the limited partnership is that the general partner must bear all legal liability for his or her management decisions. This person will need to be compensated adequately to offset these risks. In addition, the partnership agreement should include provisions that answer the question, "What if something happens to the general partner?" 

Limited Partnership Compared to Other Partnership Types

It differs from a general partnership, which has more than one general partner and also one or more limited partners.  

A limited liability partnership combines the characteristics of a partnership and a corporation. 

Some states permit a limited partnership or other partnership variation, in addition to the more general partnership form.