limited partnership

What is a Limited Partnership?

Unlike general partnerships, LPs can limit the liability and the involvement of certain partners. This is useful for attracting investment partners who might like to participate in the profits of the business but not necessarily its risks or daily operations.

It is a partnership in which only one partner is required to be a general partner.

As in a general partnership, the GPs have actual authority as agents of the firm to bind all the other partners in contracts with third parties that are in the ordinary course of the partnership’s business. As with a general partnership, “An act of a general partner which is not apparently for carrying on in the ordinary course the limited partnership’s activities or activities of the kind carried on by the limited partnership binds the limited partnership only if the act was actually authorized by all the other partners.” (United States Uniform Limited Partnership Act § 402(b).)

Like shareholders in a corporation, LPs have limited liability, meaning they are only liable on debts incurred by the firm to the extent of their registered investment and have no management authority. The GPs pay the LPs a return on their investment (similar to a dividend), the nature and extent of which is usually defined in the partnership agreement.

Limited partnerships are distinct from limited liability partnerships, in which all partners have limited liability.

RULPA states that a limited partner shall not be liable as a general partner unless he or she takes control of the business. However, a limited partner is not considered to control the business if he or she is a member of the board of directors.

Because the general partner is exposed to unlimited personal liability, LP’s sometimes are set up so that the general partner is a corporation or an LLC.