# Limited Partnership (LP): What It Is, Pros and Cons, How to Form One

> **Definition**
>
> A limited partnership (LP) is a business structure where at least two partners own the company, but only one of them manages the business.

## What Is a Limited Partnership (LP)?

A limited partnership (LP) is a business structure where at least two partners own the company, but only one of them manages the business. The [general partner](https://www.investopedia.com/terms/g/generalpartner.asp) has full [liability for the business](https://www.investopedia.com/the-best-general-liability-insurance-for-small-business-11687353) finances and is responsible for the actual [running of the business](https://www.investopedia.com/articles/pf/08/make-money-in-business.asp), while the other partner(s) only have limited liability up to the amount they invested. Limited partnerships are similar to [limited liability partnership (LLP)](https://www.investopedia.com/articles/investing/090214/limited-liability-partnership-llp-basics.asp), but LLPs have no general partners.

### Key Takeaways

*   Businesses with at least one partner and one limited partner are known as limited partnerships (LPs).
*   Limited partners initially contribute to the business, and that investment amount becomes their liability in the company.
*   General partners have full financial liability since they actively manage the business and its finances.
*   LPs must usually register with the state where the business operates and file federal taxes.

![Limited Partnership (LP)](https://www.investopedia.com/thmb/SFqZ_ScHQYK07rah3vZv0oMTS0g=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/Limited-partnership-4193607-4d28563ecfe348229857be6d9c2f059d.jpg)

*— Madelyn Goodnight / Investopedia*

## Features of a Limited Partnership (LP)

Limited partnerships are often a simple way for individuals to combine resources in order to purchase assets like real estate. One person is the general partner who is responsible for managing the [business and its finances](https://www.investopedia.com/establish-business-credit-7972523). Because of this, the general partner has unlimited liability. On the other hand, limited partners do not involve themselves in the daily running of the business, so they're only liable for the amount of their investment.

A partnership might form when limited [partners bring money](https://www.investopedia.com/the-best-startup-business-loans-8780884), property, skills or expertise to the business. However, once the limited partner has made their contribution, they must step back from the business or risk being treated as a general partner (and assume more liability). That said, limited partnerships are not usually [taxed](https://www.investopedia.com/the-best-tax-software-for-small-business-8780637) as corporations. Instead, they're [pass-through entities](https://www.investopedia.com/terms/f/flow-through.asp), so each partner reports the finances on their own [personal taxes](https://www.investopedia.com/articles/personal-finance/120915/which-type-organization-best-your-business.asp).

### Note

Since limited partnerships (LPs) are business arrangements, all parties involved should agree to the terms of the partnership before registering with the state.

Be aware that limited partnerships do not have to be permanent arrangements. For instance, if the partnership is investment-based, the partners might agree on a limited duration LP, so the partnership dissolves after the investments are liquidated.

While LPs offer great opportunities for individuals to pool resources, the structure can make it difficult for a partner to transfer their interest in the [business](https://www.investopedia.com/articles/pf/09/keep-small-business-afloat.asp) to someone else. Specifically, they may need to get the approval of all other partners before making the deal.  

## Other Types of Partnerships

Limited partnerships have much in common with other types of [partnership](https://www.investopedia.com/terms/p/partnership.asp)s, but there are key differences, especially between general partnerships and limited liability partnerships.  

### General Partnership (GP)

Unlike an LP, where there is just one general partner, in a [general partnership (GP)](https://www.investopedia.com/terms/g/generalpartnership.asp), all partners are responsible for [running the business](https://www.investopedia.com/articles/personal-finance/120815/4-most-common-reasons-small-business-fails.asp) and are fully liable. This also means all partners [share the profits](https://www.investopedia.com/the-best-accounting-software-for-small-business-8780908) equally unless a different arrangement is stated in the partnership agreement document.

You might see a type of general partnership called a [joint venture](https://www.investopedia.com/terms/j/jointventure.asp). This arrangement is made for a single project, so the partnership dissolves when the project is over. All the partners in a joint venture share liability.

### Limited Liability Partnership (LLP)

As its name suggests, a limited liability partnership (LLP) is made up only of limited partners, who all have limited liability in the business. Unlike a limited partnership, there is no general partner, so all members can actively manage the business.

Limited liability partnerships spread the risk among partners, so one general partner isn't held fully responsible for debts and management decisions.

## How to Form a Limited Partnership

Although there are regulations you must follow in order to establish a limited partnership, the process is fairly straightforward. Here's what you'll need to do:

1.  **Choose a State to Register In:** You can register where you currently are, or research states that have the most advantageous taxes for your business and plan on registering there.
2.  **Pick a Name for your Limited Partnership:** You must select a name not already taken. Usually, you'll end the name with "Limited" or "Ltd."
3.  **Write a Partnership Agreement:** The [partnership agreement](https://www.investopedia.com/ask/answers/041015/which-terms-should-be-included-partnership-agreement.asp) spells out each partner's rights, duties, and roles. Since you don't have to file this with the government, it's for your business use only. It should also spell out how the partners will share the profits and when the partnership might end.
4.  **Designate a Registered Agent like InCorp Services:** When you select an agent, you allow them to receive business information and notifications, such as tax information and lawsuits.
5.  **File your Certificate of Limited Partnership:** Each partner must agree to file the certificate with the state's Secretary of State office. The exact process will vary by state, so read the guidelines before heading to the office.
7.  **Obtain an Employer Identification Number (EIN):** In order to file your federal taxes, you'll need an [employer identification number (EIN)](https://www.investopedia.com/terms/e/employer-identification-number.asp), which you can request from the [IRS website](https://www.irs.gov/businesses/small-businesses-self-employed/get-an-employer-identification-number).
8.  **Obtain all Required Business Licenses and Permits:** Again, this varies by state and industry, but you'll need to get all the necessary permits and licenses before you start operating your business.
9.  **Open a separate Business Bank Account:** To keep the [business finances separate](https://www.investopedia.com/the-best-small-business-bank-accounts-8782069) from partners' personal accounts, you must set up a designated [business bank account](https://www.investopedia.com/terms/b/business-banking.asp).
10.  **Acquire Business Insurance:** The general partner will want to purchase [business insurance](https://www.investopedia.com/business-insurance-7105651) to [protect the business](https://www.investopedia.com/the-best-small-business-insurance-11686113) against unexpected financial situations.

> **Tip**
>
> If you're unsure what permits and licenses are required, you can check the U.S. Small Business Administration (SBA) website.

## Advantages and Disadvantages of an LP

Some of the benefits of forming a limited partnership (LP) include:

*   Limited partners have protection from financial risk.
*   All partners report their income or losses on their personal taxes.
*   The general partner actively manages the business.
*   Relatively straightforward to establish.

However, the general partner accepts more risk than the limited partners. If the general partner needs additional support, limited partners cannot step in and help manage the business, or they'll lose their personal liability protection. It's also more challenging to transfer a partner's interest in the business should partners wish to adjust the roles.

Pros

*   Limited partners have limited liability
    
*   Easy to establish and start the business entity
    
*   Pass-through taxes are done by each partner
    

Cons

*   General partners take on full personal liability
    
*   Only the general partner makes management decisions
    
*   Challenging to transfer interest or roles in the business
    

## LP vs. LLC vs. Corporation

It's easy to get limited partnerships confused with limited liability companies and corporations, but there are clear distinctions between each.

With a limited partnership, only the general partner actively manages the business but has unlimited liability. The limited partners invest in the company but don't manage the business and have limited liability. Conversely, every partner can provide input and supervision with an LLC. Because of this, partners in an LLC share the risk and liability.

Both LPs and LLCs differ from corporations, where instead of a general partner managing the company, a board of directors hires managers and oversees the running of the business. The board of directors is chosen by the shareholders, much like limited partners.

Both LPs and LLCs have pass-through taxation, meaning the profits get taxed as personal income. However, corporations must pay federal taxes on profits. Because of these requirements, it's more difficult to form a corporation than an LP or LLC.

LP

*   Made up of a general partner and limited partners
    
*   General partner has full liability and management responsibilities
    
*   Limited partners are only liable up to their investment
    
*   Taxed as a partnership
    

LLC

*   Management duties are shared among all partners  
    
*   No general partner makes the decisions and assumes all risk
    
*   All partners share liability
    
*   Can be taxed as a [C corporation](https://www.investopedia.com/terms/c/c-corporation.asp), an [S corporation](https://www.investopedia.com/terms/s/subchapters.asp), or a disregarded entity
    

## The Bottom Line

Limited partnerships can help individuals to pool resources for a shared project. The risk to limited partners is only as much as their initial investment, which the general partner uses to run the business. Limited partnerships offer flexibility so partners can decide when to dissolve the partnership.  

> **Article Sources**
>
> 1.  Cornell Law School, Legal Information Institute. “[13 CFR § 107.160—Special Rules for Licensees Formed as Limited Partnerships](https://www.law.cornell.edu/cfr/text/13/107.160).”
>     
> 2.  Internal Revenue Service. "[Tax Information for Partnerships](https://www.irs.gov/businesses/partnerships)."
>     
> 3.  CO- by U.S. Chamber of Commerce. “[What Is a General Partnership?](https://www.uschamber.com/co/start/startup/general-partnerships)”
>     
> 4.  U.S. Small Business Administration. “[Joint Ventures](https://www.sba.gov/federal-contracting/contracting-assistance-programs/joint-ventures).”
>     
> 5.  U.S. Small Business Administration. “[Choose a Business Structure](https://www.sba.gov/business-guide/launch-your-business/choose-business-structure).”
>     
> 6.  U.S. Small Business Administration. “[Apply for Licenses and Permits](https://www.sba.gov/business-guide/launch-your-business/apply-licenses-permits).”
>     
> 7.  Business.NJ.gov. "[Choose a Business Structure](https://business.nj.gov/pages/choose-a-business-structure)."