Key Takeaways

  • Limited partnerships (LPs) provide limited liability for limited partners while granting management authority and greater risk to general partners.
  • LPs are attractive to passive investors seeking returns without direct involvement or exposure to business debts.
  • Limited partnership advantages include asset protection, flexible management, pass-through taxation, and easier capital attraction.
  • LPs require less ongoing paperwork than corporations, making them simpler and less expensive to maintain.
  • Limited partnerships offer continuity and flexibility in succession planning, making them suitable for family businesses or investment ventures.

Limited partnership advantages not only benefit the business but also the limited partners. The advantages include limited liability and investment opportunities.

About Limited Partnerships

If you want to form a partnership, you might consider a limited partnership, or LP. In a limited partnership, at least one partner will be a general partner. All others will be limited liability partners. Some states call this a silent partnership.

In this business structure, two or more individuals own the business, and it has two different kinds of partners:

  • A general partner owns and operates the business.
  • A limited partner invests in the business (money or property), but doesn't make business decisions relating to operations and has no personal liability for company debts.

This type of partnership protects limited partners from personal liability, while still giving them the opportunity to invest. General partners still have personal liability.

Key Features of Limited Partnerships

Limited partnerships are structured to offer flexibility and protection for both general and limited partners. A general partner manages the day-to-day operations and holds unlimited liability for the business’s obligations. In contrast, limited partners are typically investors who contribute capital but are not involved in daily management. Their liability is restricted to the amount they have invested, shielding their personal assets from business debts or legal actions.

Limited partnerships are particularly popular among businesses seeking to attract investors who prefer a passive role. LPs are commonly used in real estate ventures, film production, private equity, and family businesses. The separation of roles allows for efficient decision-making and operational control by experienced general partners, while allowing limited partners to benefit from the partnership’s profits without direct risk beyond their investment.

Advantages for Limited Partners and LPs

Someone who's a limited partner in an LP will probably consider the biggest advantage to be the limited liability. In the event the business is sued or goes bankrupt, limited partners are only liable for their investment in the business. They're not held personally liable. However, if they've done anything as an individual to make them liable, they could be sued as an individual.

Limited partners take no role in the management of the company. They only contribute assets.

The following apply to limited partnerships:

  • The limitation on liability for the limited partners is attractive. Business creditors can't go after their personal assets due to the limitations in regards to money and potential lawsuits.
  • Investors are often attracted to LPs because they know they'll enjoy limited liability on the company's debts.
  • Partners may like the tax structure, where profits and losses pass through the company to the partners. They then report profits and losses on their personal tax returns.
  • Limited partners enjoy sharing profits without having to run the business.
  • There's an unlimited number of shareholders.
  • LPs can utilize the financial and managerial strengths of its different partners.
  • There's an unlimited cap on acquiring capital with a partnership agreement.

A limited partnership doesn't have the same formal structure that a corporation has, but it holds other advantages. It's generally easier and less expensive to set up a limited partnership compared to a corporation. Business owners who don't want all of the formalities that exist in a corporation may prefer an LP.

There's also less paperwork involved in forming a limited partnership compared to a corporation. You'll still have to draw up a partnership agreement and file it in the jurisdiction where you do business, however.

Limited partners have peace of mind knowing that if the LP is sued and loses in court, their personal assets are protected. Due to this limited liability, some people choose to set up an LP as an effective way to shield partners' assets from creditors.

In a general partnership, any money or property that an individual contributes to the business becomes an asset that belongs to all parties. This differs from the money or property limited partners contribute — their debt is only limited to the amount they put into the business.

Limited partners who don't want to take an active role in running a business may like being in an LP as a silent partner. They can sit back and let the general partners handle day-to-day operations. If they don't want to make business decisions, this is ideal for limited partners.

Limited partnerships don't end if limited partners leave the business or if the company replaces them. Therefore, the company suffers no turnover problems from limited partners.

Businesses that want to attract investors may prefer LPs. This is a good way to give investors the chance to benefit from investing in your company without giving them roles and responsibilities in running the business.

There are several types of business structures, and each has its unique advantages and disadvantages. If you're unsure which business type is best for you, you might want to consult with legal and tax professionals. They may be able to advise you, especially when you make it clear what your short- and long-term goals are.

Additional Limited Partnership Advantages

Alongside limited liability, limited partnerships offer several unique advantages:

  • Attracting Passive Investment: LPs are an excellent vehicle for raising capital from passive investors who want to share in the profits but do not wish to be involved in business decisions or assume personal risk for business debts.
  • Asset Protection: Since limited partners' liability is capped at their investment, their personal property is generally safeguarded from creditors of the business.
  • Pass-Through Taxation: Limited partnerships typically do not pay income tax at the business level. Profits and losses pass through directly to the partners, who report them on their personal tax returns, potentially avoiding double taxation.
  • Flexible Management Structure: General partners retain management control, while limited partners have no obligation or right to participate in daily operations. This clear division streamlines operations and reduces conflict among investors.
  • Ease of Succession and Continuity: LP interests are transferable, and the partnership can continue with the introduction of new limited partners or the withdrawal of current ones. This provides continuity for family businesses or investment groups.
  • Lower Regulatory and Administrative Burden: Compared to corporations, LPs have fewer formalities, less ongoing paperwork, and generally lower formation and maintenance costs.
  • Attractive for Specific Business Types: LPs are particularly suited for businesses with one or a few active managers and multiple passive investors, such as investment funds, oil and gas exploration, and real estate development.

Considerations and Limitations of Limited Partnerships

While limited partnership advantages are significant, there are a few important considerations:

  • General Partner Liability: General partners retain unlimited liability for the debts and obligations of the partnership. This risk is an important factor for those considering taking on a managerial role.
  • Limited Partner Restrictions: Limited partners must avoid active participation in management to maintain their liability protection. If a limited partner becomes too involved in operations, they risk being treated as a general partner by courts or creditors.
  • State Law Variations: Laws governing limited partnerships can differ by state. It's crucial to review local regulations regarding formation, maintenance, and partner responsibilities.
  • Requirement for Written Agreement: Although not always legally required, a detailed partnership agreement is strongly recommended to clarify roles, responsibilities, profit distribution, and procedures for dispute resolution or partner changes.

Consulting with an experienced attorney can help ensure the structure and agreement of your limited partnership align with your business goals and protect all parties involved.

Frequently Asked Questions

1. What are the main limited partnership advantages?

Limited partnerships provide limited liability for passive partners, pass-through taxation, ease of attracting investors, and simpler regulatory requirements.

2. Can a limited partner lose their personal assets if the business is sued?

No, limited partners are typically only at risk for the amount they have invested, as long as they do not participate in management.

3. Who manages a limited partnership?

General partners manage the business and assume unlimited liability, while limited partners are passive investors without decision-making authority.

4. What types of businesses benefit most from limited partnerships?

LPs are ideal for real estate ventures, investment funds, family businesses, and any enterprise seeking passive investors alongside active managers.

5. Are there tax benefits to limited partnerships?

Yes, profits and losses pass through to partners, who report them on personal returns, avoiding corporate double taxation.

If you need help with limited partnerships, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.