Limited partnership

Limited partnership (LP) is a business structure comprising at least one general partner who manages the enterprise and bears unlimited liability, and one or more limited partners who contribute capital but have liability limited to their investment and no management authority (ULPA 2001, §102)^[1]. The general partner runs the show—making decisions, signing contracts, and facing personal exposure if things go wrong. Limited partners write checks and wait for distributions; in exchange for staying silent, they risk only what they invest.

This split between active management and passive investment makes LPs the preferred structure for private equity funds, venture capital, real estate syndications, and family wealth planning. When Blackstone or KKR raises a fund, the fund is an LP. The investment firm serves as general partner (usually through an LLC subsidiary); pension funds and endowments invest as limited partners. Billions flow through these structures annually.

Formation and requirements

Creating an LP involves specific formalities:

Filing requirements

Certificate of limited partnership. LPs form by filing with the state secretary of state—typically requiring partnership name, principal office address, registered agent, and general partner identification^[2].

Name requirements. The partnership name usually must include "Limited Partnership," "L.P.," or similar designation, alerting third parties to the structure.

Partnership agreement. While not always legally required, a detailed partnership agreement governs internal relationships—capital contributions, profit allocation, distributions, decision-making, withdrawal terms. Well-drafted agreements prevent disputes.

Ongoing compliance

Annual filings. Most states require periodic reports and fees to maintain good standing.

Registered agent. A registered agent must maintain a physical address in the state of formation for service of process.

Partner roles and responsibilities

The two partner classes have distinct characteristics:

General partners

Management authority. General partners control day-to-day operations, make business decisions, and bind the partnership in contracts. They have the rights and responsibilities of partners in a general partnership.

Unlimited liability. General partners face personal liability for partnership obligations. If partnership assets are insufficient, creditors can pursue general partners' personal assets^[3].

Fiduciary duties. General partners owe fiduciary duties to the partnership and limited partners—duties of loyalty and care that constrain self-dealing.

Entity as GP. To avoid personal liability, the general partner is often an LLC or corporation rather than an individual. The entity provides liability protection to its owners while serving the GP function.

Limited partners

Passive investment. Limited partners contribute capital but don't participate in management. They're sometimes called "silent partners" because they have no voice in operations.

Limited liability. A limited partner's maximum loss is their capital contribution. Creditors cannot reach limited partners' personal assets.

No management participation. The trade-off for limited liability is exclusion from management. Limited partners who participate too actively in management may lose liability protection under the "control rule"^[4].

Information rights. Limited partners typically have rights to partnership financial information, though the agreement defines specifics.

Tax treatment

LPs offer tax advantages:

Pass-through taxation. The partnership itself pays no income tax. Instead, profits and losses "pass through" to partners, who report them on individual returns.

Avoiding double taxation. Unlike corporations, which pay corporate tax on profits and shareholders pay again on dividends, partnership income is taxed once at the partner level.

Allocation flexibility. Partnership agreements can allocate profits, losses, and specific items among partners in various ways, subject to IRS rules requiring economic substance.

Schedule K-1. Each partner receives Form K-1 reporting their share of partnership income, deductions, and credits for inclusion on personal returns^[5].

Common uses

LPs serve specific purposes:

Investment funds

Private equity. PE funds are almost universally structured as LPs. The fund manager (or its affiliate) serves as general partner; institutional investors and high-net-worth individuals invest as limited partners. Management fees and carried interest flow to the GP.

Venture capital. Similar structure—VC firms manage as GPs; investors provide capital as LPs.

Hedge funds. Many hedge funds use LP structures, particularly domestic funds (offshore funds may use different vehicles).

Real estate. Syndicated real estate investments often use LPs, with a sponsor as GP and passive investors as LPs.

Family wealth planning

Family limited partnerships (FLPs). Families use LPs to consolidate assets, achieve valuation discounts for estate tax purposes, and transfer wealth while parents retain management control^[6].

Succession planning. Parents serve as general partners; children receive limited partnership interests over time.

Special projects

Film and entertainment. Movie productions often organize as LPs to raise capital from investors while producers maintain creative control.

Joint ventures. LPs can structure joint ventures where one party contributes management expertise and another contributes capital.

Advantages

LPs offer several benefits:

Limited liability for investors. Passive investors risk only their investment.

Management concentration. General partners maintain full control without investor interference.

Tax efficiency. Pass-through taxation avoids double taxation.

Flexibility. Partnership agreements allow customized arrangements for profit sharing, governance, and other terms^[7].

Capital raising. LPs efficiently raise capital from multiple investors while maintaining operational control.

Disadvantages

LPs have limitations:

GP unlimited liability. At least one party must accept unlimited liability (though entity structures mitigate this).

Limited partner passivity. Investors have no control over operations, which may not suit all investors.

Transferability restrictions. Partnership interests typically aren't freely transferable, reducing liquidity.

Complexity. Formation, compliance, and tax reporting are more complex than sole proprietorships or general partnerships.

Limited partners' restricted role. The "control rule" can trap limited partners who engage too actively^[8].

Related structures

Other partnership forms offer variations:

Limited liability partnership (LLP). All partners have limited liability for other partners' malpractice; common for professional firms.

Limited liability limited partnership (LLLP). Combines LP structure with limited liability protection for general partners.

Limited liability company (LLC). Offers limited liability to all owners with flexible management options; increasingly used instead of LPs.

Limited partnership — recommended articles

Partnership — Corporate governance — Business organization — Private equity

References

• ULPA (2001), Uniform Limited Partnership Act, Uniform Law Commission.
• IRS (2023), Partnership Tax Information, Internal Revenue Service.
• Hamilton R.W., Macey J.R. (2007), Cases and Materials on Corporations, 11th Edition, Thomson West.
• Ribstein L.E. (2010), The Rise of the Uncorporation, Oxford University Press.

Footnotes

1. ↑ ULPA (2001), §102 Definitions
2. ↑ Hamilton R.W., Macey J.R. (2007), Corporations, pp.23-45
3. ↑ ULPA (2001), §404 General Partner Liability
4. ↑ Ribstein L.E. (2010), Rise of the Uncorporation, pp.89-112
5. ↑ IRS (2023), Partnership Tax Information
6. ↑ Hamilton R.W., Macey J.R. (2007), Corporations, pp.134-156
7. ↑ ULPA (2001), §110 Partnership Agreement
8. ↑ Ribstein L.E. (2010), Rise of the Uncorporation, pp.145-167

Author: Sławomir Wawak