A limited partnership (LP) consists of two types of partners: general and limited partners. This structure allows for the combination of the management flexibility of a general partnership with the limited liability protection for certain partners similar to that of a corporation.
Here are the key characteristics of a limited partnership:
General Partners: A limited partnership must have at least one general partner, who is responsible for managing the business and has unlimited personal liability for the debts and obligations of the partnership. General partners have authority over the day-to-day management and decision-making of the business.
Limited Partners: Limited partners are investors in the partnership who contribute capital to the business but have limited involvement in its management. Unlike general partners, limited partners have limited liability, meaning their assets are generally protected from the debts and liabilities of the partnership beyond the amount of their investment. However, limited partners typically cannot participate in the day-to-day management of the business without risking the loss of their limited liability protection.
Limited Liability: Limited partners enjoy limited liability protection, meaning their assets are shielded from the partnership’s liabilities. This protection is similar to that of shareholders in a corporation.
Pass-through Taxation: Similar to other partnership structures, limited partnerships are usually treated as pass-through entities for tax purposes. This means that the profits and losses of the partnership are passed through to the individual tax returns of the partners, who then report their share of the income or losses on their tax returns.
Formation and Registration: Limited partnerships are typically formed by filing the necessary paperwork with the appropriate state authorities and complying with any registration requirements. This often includes drafting and filing a partnership agreement that outlines the roles, responsibilities, and rights of the partners.