Limited Partnerships

In limited partnerships (LPs), there are two types of partners: general partners, who manage the business and assume all liabilities as owners and managers; and limited partners, who provide capital for the business and whose individual liabilities are limited to the amount of their respective capital contributions. Limited partners do not participate in management but share in the profit of the business. They are more like investors.

Some features of limited partnerships include:

• Personal liabilities of owners: General partners have unlimited personal liability for the obligations of the business; limited partners generally have no personal liability.
• Taxation: No tax at the entity level, the profits and losses are passed through to the general and limited partners.
• Business formation: More regulations than general partnerships, usually require state licensing.
• Membership rules: Unlimited number of general and limited partners allowed.
• Management: Only general partners are allowed in the day-to-day operation of the business.

Advantages of LPs:

• The limited partners have liability protection.
• No tax at the entity level.
• Good way of equity financing through limited partners.

Disadvantages of LPs:

• No liability protection for general partners.
• Limited partners are not allowed in the business management.
• More regulations than general partnerships.
• The current tax code restricts passive loss deduction for limited partners.