What Is a Limited Partnership (LP)? Limited Partners Explained

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A limited partnership (LP) is a business entity with two classes of owners: at least one general partner, who manages the business and is personally liable for its debts, and at least one limited partner, who contributes capital but generally cannot lose more than that contribution. In business and finance, “LP” can mean the entity itself or a limited partner. In investment news, “LPs” usually refers to the investors in a private equity, venture capital or real estate fund, while the firm running the fund is the “GP.”

What Is a Limited Partnership (LP)?

An LP is a partnership created under state law by filing a certificate of limited partnership with the state, usually with the secretary of state. Without that filing, people who run a business together for profit are generally treated as a general partnership, where every partner is fully liable.

The structure separates control from capital. The general partner makes decisions and carries the risk. The limited partners supply money (or property) and receive a share of profits in return. Unlimited liability belongs only to the general partner. A limited partner’s exposure is normally capped at what they contributed or agreed to contribute.

An LP has partners, not shareholders. Owners hold partnership interests, and their rights come from the partnership agreement and state partnership law. Publicly traded partnerships call these interests units, and unitholders are limited partners.

How a Limited Partnership Works

The general partner

The general partner runs the business: signing contracts, hiring, managing assets, keeping the books and making distributions. Because it controls the business, it is personally liable for all partnership debts and obligations that the partnership’s assets cannot cover.

The general partner does not have to be an individual. Fund sponsors and real estate operators often use a corporation or an LLC as general partner, which keeps the unlimited liability inside that entity rather than with the people who own it.

The limited partners

Limited partners contribute cash, property or other agreed value and receive an economic interest. Their typical rights include:

• A share of profits, losses and distributions as set out in the partnership agreement
• Access to partnership books and financial information
• Voting on major matters the agreement reserves to them, such as admitting new general partners, selling substantially all assets, amending the agreement or dissolving the partnership
• In many agreements, the right to remove and replace the general partner under defined conditions

Limited partners do not manage day-to-day operations. Older state LP laws had a “control rule”: a limited partner who took part in controlling the business could be treated like a general partner by creditors who relied on that involvement. Many states that adopted the Uniform Limited Partnership Act (2001) removed it. Others keep versions with safe harbors for activities such as voting or consulting with the general partner, so how far a limited partner can go depends on the state of formation and the agreement.

Investment fund LPs

In investment LPs, the agreement’s allocation and distribution rules matter most, and they need not match ownership percentages. Fund agreements often pay the general partner a management fee and a carried interest, a share of profits above a hurdle rate. Limited partners commit capital up front, and the general partner draws it down through capital calls as investments are made. Capital already sent is paid-in or contributed capital. The portion committed but not yet called is unfunded commitment. Fund LPs commonly judge results with the internal rate of return (IRR), because the timing of calls and distributions affects returns.

Taxation

A U.S. limited partnership generally does not pay federal income tax itself. It files an informational return (Form 1065) and issues each partner a Schedule K-1 showing their share of income, deductions and credits. Each partner reports those amounts on their personal or corporate return.

Partners are taxed on their allocated share of income even if the partnership keeps the cash, which can leave a partner owing tax on income they never received. A limited partner’s distributive share is generally excluded from self-employment tax, except for guaranteed payments for services, while a general partner’s share of trade or business income is generally subject to it. Loss deductions are limited by tax basis, at-risk amounts and the passive activity rules. Because limited partners are passive by design, their losses often offset only passive income.

Why Is a Limited Partnership Important?

The LP lets an operator raise outside money without giving up control, and lets investors participate without taking on unlimited liability. That trade explains where the structure appears:

• Real estate. A sponsor acts as general partner, buys and manages a property, and raises equity from limited partners.
• Private equity and venture capital funds. The fund manager or an entity it controls is the general partner. Pension funds, endowments, family offices and wealthy individuals are the limited partners.
• Master limited partnerships. These publicly traded partnerships must earn at least 90% of gross income from qualifying sources such as natural resources and real estate to keep partnership tax treatment, which is why MLPs cluster in energy pipelines and storage.
• Family limited partnerships. Parents typically act as general partners and transfer limited partnership interests to children, keeping control while moving economic ownership.
• Fixed-term projects. Partners can agree on a set duration, so the LP dissolves once its investments are sold and proceeds are distributed.

Example of a Limited Partnership

Hypothetical example for illustration only.

Maple Street Partners, L.P. is formed to buy an apartment building. The general partner is Maple GP LLC, owned by an experienced property manager. It contributes $100,000. Nine limited partners contribute $100,000 each, so total equity is $1,000,000. The partnership agreement allocates profits 20% to the general partner and 80% to the limited partners, split equally among the nine.

A profitable year. The LP earns $180,000 of taxable income and distributes only $90,000, keeping the rest for repairs. Each limited partner is allocated $16,000 of income ($180,000 × 80% ÷ 9) and reports that full amount on their K-1, even though each received only $8,000 in cash. The general partner entity is allocated $36,000.

A failed project. Later the building is sold at a loss. After all partnership assets are used, $400,000 of unpaid obligations remain to a contractor and other unsecured creditors. The limited partners lose their $100,000 contributions but owe nothing more. The general partner is liable for the $400,000. Because the general partner is an LLC, creditors’ claims are against that LLC’s assets, not the property manager’s home, unless the manager signed a personal guarantee.

If one limited partner had been negotiating with the contractor and directing the renovation, creditors in a state that keeps the control rule could argue that partner should be liable like a general partner.

How to Form a Limited Partnership

Requirements vary by state, but the core steps are usually these:

1. Choose the state of formation. Most LPs form where they operate. Some pick a state for its partnership law or fees and register to do business elsewhere.
2. Pick a name that is available and includes the required designator, such as “Limited Partnership,” “L.P.” or “LP.”
3. Appoint a registered agent in the state to receive legal papers and official notices.
4. File a certificate of limited partnership identifying the general partner(s) and the registered agent, and pay the filing fee.
5. Write a partnership agreement. It is usually not filed with the state, but it governs contributions, profit and loss allocation, distributions, management powers, voting, transfers, withdrawal and dissolution.

The LP then needs an Employer Identification Number (EIN) from the IRS, any required licenses and permits, a separate bank account and insurance, which matters most for the general partner.

Limitations of a Limited Partnership

For general partners:

• Unlimited personal liability unless the general partner is itself a limited liability entity.
• Fiduciary duties to the limited partners, and exposure to claims if those duties are breached.

For limited partners:

• Little say in operations. If the general partner performs poorly, the remedy is whatever voting, removal or exit rights the agreement provides.
• Interests are illiquid. Agreements commonly require the general partner’s or other partners’ consent to transfer. A buyer may receive only the economic rights, not full partner status, unless admitted as a partner.
• K-1s can arrive late, and an LP operating in several states can create filing obligations in those states.

For the entity:

• Formation and annual state filings add cost compared with a general partnership.
• Withdrawal of a general partner can trigger dissolution unless the agreement provides for continuation.

LP vs. Similar Structures

General partnership vs. limited partnership. A general partnership can arise without any filing, and profits are split equally unless the partners agree otherwise. A joint venture formed for a single project is often a general partnership. An LP needs a state filing and creates the passive, liability-limited limited partner class.

LLP vs. LP. An LLP has no general partner. Every partner can take part in management and keep liability protection, and a partner is generally not liable for another partner’s malpractice or misconduct. Law and accounting firms use LLPs, and some states restrict them to licensed professions. An LP suits a clear operator with passive investors. An LLP suits a firm of active co-owners.

LLC vs. LP. An LLC gives every member limited liability even when members manage, which is why many small businesses choose LLCs. LPs remain common in funds and syndications, where the two-tier GP/LP split, established fund terms and limited partners’ self-employment tax treatment fit the arrangement.

Corporation vs. LP. Limited partners resemble shareholders in being passive and liability-limited, but they cannot elect a board of directors and have only the voting rights the partnership agreement gives them. A C corporation also pays tax on its profits, and shareholders pay tax again on dividends.

FAQs

The Bottom Line

The LP fits ventures with a clear operator and passive investors, such as real estate syndications and private equity or venture capital funds. Investors gain capped liability and pass-through taxation but accept little control, illiquid interests and possible tax on undistributed income. Operators keep control while raising capital, and they can limit personal exposure by placing the general partner role in an LLC or corporation.