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A limited partnership (LP) is similar to a general
partnership while still offering limited liability
protection to some of the partners. In an LP, at least
one partner must be a general partner with unlimited
liability, and at least one partner must be a limited
partner whose liability is limited to the amount of
his or her investment. Limited partners act as “silent
partners” making a capital investment much like
passive shareholders in a publicly traded corporation
but having no involvement in the management
decisions of the business.
An LP allows for pass-through taxation, as its income
is not taxed at the entity level. Limited partners can
use losses to offset other passive income on their tax
returns. General partners losses can be used to shelter
other income up to the value of their investment in
the partnership since their losses are not usually
considered passive.
The LP organization
is especially appealing to types of businesses where
a single, limited-term project is the focus such as real
estate or the film industry. LPs can also be used as
a form of estate planning.
Advantages of a Limited Partnership:
- LPs allow for pass-through taxation
- Limited partners are not held personally responsible for the debts and liabilities of the business
- Provides additional sources of investment capital
- The general partner(s) have full control over all business decisions
- Partners have more flexibility in structuring the management with less formal requirements and annual paperwork
