What Is a Limited Partnership? Definition, Types, Pros, and Cons

A limited partnership (LP) is an entity formed by at least two partners. Any limited partnership requires one general partner, which is responsible for managing the business, and an unlimited number of limited partners are not directly involved in managing the business. However, they are stakeholders and stand to benefit from the limited partnership success. Each partner must contribute with tangible assets or intangible assets. Partners may also contribute with work over the course of the partnerships’ life.

Characteristics of limited partnerships

The main difference between the general partner and limited partners is their liability in regard to the business. The general partner is liable for all of the company’s debts. Conversely, the limited partners are only liable for their investment in the partnership. Thus, the limited partners have limited liability, but the general partner has unlimited liability.

A partnership is formed through a limited partnership agreement. A limited partnership agreement is signed between all the parties involved. It details the ownership structure, the decision-making process, and the goals behind the partnership. Along with some other key aspects that define the business.

Types of limited partnerships

General partnership

A general partnership (GP) is the most simple form of partnership. It requires no registration because it is not recognized as a business entity. However, the general partner and the limited partners are required to sign a limited partnership agreement. A general partnership differs from other types due to the fact that all the partners are liable. This means that they bear the responsibilities of debt and tax obligations. Therefore all the partners are involved in the management and everyday decisions. 

Limited liability partnership

A limited liability partnership (LLP) is extremely similar to a general partnership. This means that partners bear the same risks. However, they are not responsible for their peers’ mistakes, errors, or omissions. This is the greatest difference between the two. Not every state allows limited liability partnerships, and it might be dependent on the kind of business you want to conduct.

Limited partnership 

A limited partnership (LP) is an entity that is required to be registered with legal authorities. Limited partners have limited liability, and their losses in the partnership cannot be greater than the capital they invested. The general partner is responsible for managing the business and is liable for the debt and other obligations of the partnership. It is common for limited partnerships to be established with a limited liability company (LLC) as a general partner. This type of partnership structure mitigates the liability risk. However, this sort of structure is not allowed in certain states.

Limited liability limited partnership

There is also a limited liability limited partnership (LLLC). This is a relatively new type of partnership that has been adopted in some states. A limited liability limited partnership is in every way similar to a limited partnership (LP). The only difference is that the general partner liability is limited. Therefore all of the partners involved have limited risk.

Advantages and disadvantages of limited partnerships

There are several advantages to limited partnerships, and depending on the type of business structure you want to have it might be a great option. Consider the following advantages and disadvantages of limited partnerships:

Advantages of limited partnerships

One of the main advantages of the limited partnership is that it allows entrepreneurs to easily create an entity to capture investment. Therefore they can attract unlimited limited partners that might want to invest in their business.

Limited partnerships also have several tax advantages that vary depending on the state. This is because the regulations for limited partnerships are very different from state to state. However, they still need to be registered. 

Another great advantage is that limited partnerships allow an entrepreneur to combine different investors with expertise in different fields. This can be extremely beneficial. 

Limited partners have limited liability, and for that reason, they might not be so involved in the day-to-day operations. 

Limited partners can also be easily changed, or sell their stake without changing the partnership structure, or agreement.

The paperwork and bureaucracy involved in a limited partnership are much less than a regular company. Therefore it benefits the partners that are able to solely focus on the business.

Limited partnerships remain the best type of entity to attract investment. It allows seasoned investors to invest in different businesses without having to manage them.

The fact that the general partner is liable for all of the partnership’s debt also instills trust in limited partners to invest. It somewhat guarantees that the general partner will do everything possible in order for the partnership to be successful. Although this is also a disadvantage for the general partner.

Disadvantages of limited partnerships

Perhaps the biggest disadvantage of limited partnerships is related to the general partner. Since the general partner is ultimately liable for all of the partnership’s debts, it can be a great risk. General partners bear the highest responsibility and the greatest risk.

Limited partners do not have an active role when it comes to running the business. This is a disadvantage, as they cannot directly decide how the business should be run. This could lead to conflicts between all the partners.

Partnerships may be prone to arising conflicts between partners. This can happen for a number of reasons, and could ultimately have a negative impact on the partnership. This type of dispute could lead the partnership to break up.

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