What is Limited Partnership | Guide 2024

March 28, 2024
13 Minutes
Modified on:
March 28, 2024
Written by:
Swati Bucha
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 A limited partnership (LP) is a business entity owned by two or more partners. Two categories of partners are involved in a limited partnership: general and limited. Establishing a limited partnership (LP) allows a business to maximize the proficiency of a general partner in overseeing the operations and capital sharing of a limited partner. 

It involves at least one general partner accountable for operating the business and unlimited liability for any debt. The limited partners’ obligation is confined to the total value of their investments. Are you considering starting a small business with a limited partnership as the legal business structure? This guide explains everything about limited partnerships, covering all the important aspects, like their key characteristics, how they are formed, and their legal implications.  

Characteristics of Limited Partnership

 Let's understand the key characteristics of a limited partnership business structure:

  • At least one general partner forms this business entity and can have one or more limited partners.
  • The general partner owns unlimited fiscal obligation.
  • In this business model, the general partners have complete management control of the corresponding business and limitless financial liability for their debts. 
  • On the other hand, limited partners have minimal or zero involvement in management. However, their liability is restricted to their limited partnership investment volume.
  • The limited partnership business model is frequently used by individuals to jointly capitalize on their funds in real estate and other ventures.
  • Real estate investment and hedge funds frequently adopt the limited partnership business model to protect investors from the financial ramifications of unsuccessful ventures.
  • LPs differ from other partnerships in that only limited partners have limited liability. Hence, they are not liable for business debts exceeding their initial investment. However, general partners are fully responsible for debts, and their assets might be used to settle the debt. 

How to Form a Limited Partnership?

After understanding limited partnerships, let’s understand how to formulate one. Before establishing a limited partnership (LP), all its partners should be available to register the business with the pertinent state regulations and protocols. This is typically accomplished through the local administrator of the state's office. Remember that business licenses and permits differ based on district, state, or industry. Here are the steps to form a limited partnership: 

Step 1: Select a Business Name.

Choose a unique business name that doesn’t match any other registered business name in the state's records. Ensure that you choose a business name that gives an understanding of your services and that a domain name is available for the same. If you cannot think of any name, you can utilize a business name generator to get inspiration. Also, remember that the business name should end with Ltd or Limited for limited partnerships. For example, Smith and Jones Ltd.

Step 2: Get a Registered Agent.

Every LP in the US requires a registered agent who plays an important role in receiving important documents from the state (service of paperwork or annual report reminders), informing your business about the receipt, and forwarding the essential documents to the partners. The agent serves as a point of contact for the state to connect with business owners. 

Anyone can become a registered agent; however, this may change depending on the state in which you are registering. For example, in Colorado, all the registered agents must be above 18 years old, and there is no such regulation in other states. Most states don't have strict rules on who can become a registered agent, except that LP cannot be its registered agent. 

Step 3: File the Certificate with the State Government.

The next step in registering your business as an LP is filing for a Limited Partnership certificate with your State's Secretary of State Office. This certificate will require some information, like:

  • Name of the business ending with Ltd or Limited, 
  • Details regarding the registered agent who will receive all the legal documents and notice on your business's behalf, 
  • Name and address of your general partners,
  • The signature of the general partner or whoever is filing the form is required. 

Step 4: Formulate a Partnership Agreement.

After filing for the certificate, a partnership agreement should be created among the parties to clearly outline every partner's duties, rights, and responsibilities. This is an optional step as it is not filed with the state. 

Here are some points that should be mentioned in the partnership agreement:

  • Responsibilities of each partner,
  • Capital contribution,
  • Distribution and withdrawals, 
  • management and voting rights, 
  • Procedure for meetings, 
  • Conditions for ownership transfers and 
  • Prohibited transactions. 

Step 5: Apply for an Employer Identification Number (EIN) Through IRS. 

EIN is also a federal tax ID number, which businesses can obtain by registering on the IRS website. Just like every individual has a social security number, this nine-digit number is required to identify your business for taxation purposes. This number can help your business complete many tasks, like opening a bank account, getting a small business loan, and hiring employees. 

Step 6: Acquire the Essential Business Permits and Licenses

Some states require LPs to form compliantly and get a general business license, but it is not mandatory in all states. Regardless of whether your state requires a general business license, your business will still require at least one license or permit. Businesses in agriculture, aviation, mining, firearms, and broadcasting industries will either require state or federal permits or, in some cases, both. 

Different licenses are required, like occupancy permits or liquor licenses. Ensure you check in with your government agency that has power over your business to get all the relevant licenses necessary in your state to conduct business. 

Step 7: Complete all the Financial Obligations. 

You must open a bank account for your business and an accounting system to manage all the expenses and income. Opening a bank account is simple; all you need is EIN and ask the bank officials to open a bank account for your business. Utilizing the bank account strictly for business purposes is essential because mingling the business and personal assets can make your LP susceptible to lawsuits, administrative dissolutions, and other issues. 

Step 8: Apply for Insurance.

If you have employees, you must apply for workers’ compensation insurance. This applies in most states; however, it is not applicable or mandatory in Texas. Still, you should get insurance. Depending on the nature of your business, you may need to go through different industry-specific insurance policies. Getting a general liability policy is best, especially if your business has physical retail stores. 

How to Dissolve a Limited Partnership

In case you aim to terminate the limited partnership (LP), it is necessary to conduct a vote to dissolve it and subsequently send the required documents to respective state establishments. You also need to settle your business affairs by:

  • Selling or liquidating the physical assets of the company,
  • Resolving partnership obligations,
  • Allocating remaining assets among the partners,
  • Terminating any business contracts,
  • Revoking business licenses, permits, and registrations, and
  • Processing the closing of all the bank accounts.

Legal and Tax Implications of Limited Partnership 

A limited partnership is a type of partnership business structure, and this type of business is taxed like a partnership. However, since the role and responsibilities of partners change, the amount of tax the owners have to pay also changes. 

The limited partnership business is taxed under the pass-through business model. Under this model, the profits and losses of an LP directly flow to the business owners, who report their shares on their tax returns. The sharing of profit or loss is determined according to the partnership agreement and is generally proportionate to the partners' ownership in the business. For example, if a partner has 50% ownership, that partner has 50% of the share in the overall profit or loss.

General partners must pay self-employment taxes since they manage the business's day-to-day operations. As of 2013, self-employment taxes, including Social Security and Medicare taxes, account for 15.3% of the total partner's income. However, limited partners have a tax break; they do not have to pay the self-employment tax.

If the LP business reports a loss, partners can deduct losses up to their investment amount. If the loss exceeds the investment amount, the partner can carry the excess to upcoming years to offset that year's profitability. Limited partners can carry the losses back two years and forward twenty years. 

Different Types of Businesses That Can Have Limited Partnership Structures

Businesses establishing a limited partnership typically own or oversee particular assets. A general partner exercises control over the assets, oversees the business, and is responsible for its debts. The remaining partners (limited partners) don’t have managerial responsibilities. They are only accountable for debts up to their investment amount.

Let’s go through some of the scenarios where a limited partnership proves to be the ideal choice.

  1. Family Business

A family business, like a cleaning business, can have multiple investors. However, only a few are entitled to operate the business. Those who make enough investments are the limited partners, whereas those appointed to operate the business are the general partners. The management duties can be transferred to the succeeding generation members. 

  1. Law and Accountancy Business

Professional businesses, like law and accountancy firms, can have limited partnership ownership. Senior partners may wish to serve as limited partners in such businesses, designating their management duties to the general partners.

  1. Commercial Real Estate Business 

Another example of a business that can have a limited partnership structure is a real estate business. In this type of business, the limited partners can invest in the project and gain returns after completion. General partners are accountable for managing the project’s construction and maintenance.

Benefits of Limited Partnership

 Let's look at the benefits of establishing a limited partnership: 

  1. Flexibility and Versatility

A limited partnership offers a great option for owners with diverse business ambitions. A limited partnership simplifies decision-making for those dedicated to managing a business and ensuring its success. On the other hand, individuals willing to expand their investment portfolio benefit from a limited partnership's expansion and diversification capability. Limited partners can convert into general partners if they want higher engagement in business operations.

 2. Passive Investment

The limited partners own limited liability and aren't anticipated to dedicate substantial time to the business. Hence, a limited partnership is suitable for investors. You can establish a limited partnership if you aim to commence a business with insufficient capital. As a general partner, you will handle the liability risk and supervise business operations. On the other hand, the limited partners can amass their profits.

 3. Reduced Risk

Due to their limited liability, limited partners need not risk their money to fulfill business debts.

4. Easy to Establish and Maintain

Establishing a limited partnership is easy, as only one form needs to be filled out, and the fee is affordable. Each partner's duties are typically static and straightforward. The general partners make business decisions, whereas limited partners offer the funds. The partnership agreement specifies how profits are allocated and how the limited partnership is dissolved.

Limitations of Limited Partnership

Let's look at some disadvantages of limited partnership business: 

  1. Unlimited Liability for General Partners.

General partners bear unlimited liability, so creditors can pursue them to repay business debts. This poses a risk compared to limited liability companies (LLCs) and corporations, where owners have limited liability.

  1. Limited Tax Flexibility

 The flexibility of LP is limited, unlike that of LLCs. You don’t have a choice between being taxed as a pass-through model or as a corporation. Partnerships can’t choose to be taxed in the form of a corporation. Moreover, owners should state their profits on returns.

  1. Limited Decision Capability

Limited partners don’t have decision-making authority. They can work as a general partner and be involved in the business decision-making process. However, doing so makes their limited liability protection vulnerable. To protect personal assets, limited partners should not be involved in management decisions. However, if they are not involved, it can be challenging to invest in a business without control.


Limited partnerships are suitable entities to raise capital for asset pools and particular investments. They help limited partners make investments while simultaneously mitigating their liability. Investment partnerships and hedge funds are widely used because they allow capital to be raised without abandoning control.


1. When is a limited partnership considered the best choice?

Formulating a limited partnership is wise if one partner hopes to administer the business and the rest of the partners plan to capitalize.

2. How does a limited partnership vary from a limited liability company (LLC)?

Limited partnerships consist of general partners and limited partners. Conversely, an LLC can allow limitless members to participate. Usually, all members of an LLC have managerial rights, whereas limited partners in a limited partnership are not actively engaged in business operations.

3. Is it easy to form a limited partnership? How?

Creating a limited partnership is easy because it adopts a less formal structure and does not require annual meetings. Moreover, limited partnerships allow business owners to secure new investments without compromising their control.

4. How does a limited partnership operate if a general partner dies?

If a general partner of LP dies, the partnership may be dissolved and the company confiscated. However, if the LP business has multiple general partners, the rest of the partners can sustain business operations.

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