What is a Limited Partnership?

A limited partnership (LP) is a business structure that consists of general partners and limited partners that conduct business together as co-owners, but only the general partners are responsible for liabilities and business operations. Limited partners have limited liability as long as they do not participate in the control of the business.

A significant benefit of an LP is that if a judgment creditor obtains a judgment against one partner, the creditor is paid only from that partner’s share in distributions from the partnership’s profits while the other partners and their investment are protected from debts belonging to the partner named by the creditor.

It is important to check state specific laws on liability protection for LPs because some state laws detail the extent of liability protection available.

General vs. Limited Partners

General partners are the operators of the business who control and manage the partnership. Because of their additional duties, general partners are usually paid an additional management fee. As general partners are the ones mainly responsible for business operations, they are also jointly and severally liable for all the debts and obligations of the LP.

Limited partners are not involved in the management of the partnership, which means that they are only liable up to the amount they invested in the partnership. If limited partners assume responsibilities for running the business, they will lose their liability protection

Corporate Partner Alternative

Another way to structure a limited partnership so that all partners have even more liability protection is to substitute individual partners with a corporation. This is a way to manage risk exposure because corporations are considered to be separate legal entities so individuals are protected from a direct attack by a judgment creditor because the ultimate liability for debts rests with the corporation. Additional benefits of dividing ownership by using a corporation as a partner are reduced taxes on distributions and availability of investment credits.

Case Studies: Understanding Limited Partnerships

Case Study 1: General vs. Limited Partners

John and Mary decide to start a real estate development business together. They form a limited partnership (LP), with John as the general partner responsible for managing the day-to-day operations and Mary as a limited partner providing financial investment.

In this arrangement, John has unlimited liability for the debts and obligations of the LP, while Mary’s liability is limited to her investment in the partnership. This structure allows them to pool resources while protecting Mary’s personal assets from business liabilities.

Case Study 2: Liability Protection With Corporate Partners

Sarah and David want to open a tech startup and choose to form a limited partnership with a corporate partner. They create an LP where a corporation is the general partner responsible for the management, and Sarah and David are limited partners contributing their investments.

By using a corporate partner, Sarah and David benefit from additional liability protection. The corporation takes on the liability, shielding Sarah and David’s personal assets from potential claims related to the business.

Case Study 3: Maintaining Liability Protection

Mark and Lisa form an LP to invest in real estate properties. Mark takes an active role in managing the properties, while Lisa provides financial backing as a limited partner. To preserve Lisa’s liability protection, they ensure that she does not participate in the management or decision-making process of the business.

By adhering to the limitations of a limited partner, Lisa secures her liability protection while enjoying the benefits of passive investment.

Getting Legal Help

If you need help deciding which business structure is best for you, speak with a corporate attorney to discuss your options.