What is a Limited Partnership, Anyway?

A limited partnership has characteristics similar to both a corporation and a partnership.

The general partners have control and unlimited personal liability, but the limited partners, who put up money have their liability limited to the amount of their capital contribution to the partnership (like corporate stock).

A limited partnership must have at least one general partner and one or more limited partners.

Advantages

A limited partnership usually only needs to file a one-page document, called a Certificate of Limited Partnership, with the state upon formation and pay a fee. In a handful of states, however, the limited partnership is also required to file an initial report and continuing annual reports with the state to update the contact information for the partnership, resident agent, general partners, and in some cases, the limited partners.

Capital can be contributed by limited partners who have no control over the business and no liability for its debts or obligations.

Just like general partnerships, limited partnerships have higher maintenance costs than a sole proprietorship because they must track assets and liabilities as well as income and expenses.

Disadvantages

Like a general partnership, your attorney should prepare a limited partnership agreement to define the ownership and sharing arrangements of the partners.

In a limited partnership, the general partner is personally liable for partnership debts and for the business-related acts of other general partners.

Limiting Liability: To limit the general partner's liability, use a corporation or LLC as the general partner.

Limited partners give up most of their control over the business in exchange for limited liability. When limited partners take an active role in the running of the business, they jeopardize their protection from liability and can be held liable as a general partner.

In recent years, the limited liability company has overtaken the limited partnership as the tax-advantaged vehicle of choice, because everyone involved has limited liability and investors can participate in the decisions of the company.