Legal Definitions - limited partnership

Limited partnership (LP) is a business structure that combines elements of a traditional partnership with features that limit the personal financial risk for some of its owners.

In an LP, there are two distinct types of partners:

• General Partners: These partners are responsible for the day-to-day management and operations of the business. They have unlimited personal liability, meaning their personal assets (like their home or savings) can be used to satisfy the partnership's debts and obligations if the business cannot pay them.
• Limited Partners: These partners contribute capital (money or assets) to the business but do not participate in its management. Their personal liability is limited to the amount of capital they have invested in the partnership. This means their personal assets are generally protected from the partnership's debts beyond their initial contribution.

The primary advantage of an LP is that it allows investors to contribute funds to a business venture without taking on the full personal financial risk associated with active management. However, this protection comes with the condition that limited partners typically cannot be involved in the operational decision-making of the business; if they do, they risk losing their limited liability status. LPs must also be formally registered with the appropriate state agency.

Here are some examples of how a limited partnership might be used:

• Real Estate Development Project: Imagine a seasoned property developer, Sarah, wants to build a new apartment complex but needs significant funding. She forms a limited partnership. Sarah acts as the General Partner, managing all aspects of the construction, financing, and marketing. Wealthy individuals, like David and Emily, invest substantial sums into the project, becoming Limited Partners. David and Emily receive a share of the profits but have no say in the construction decisions and are only at risk for the amount they invested, protecting their personal assets if the project encounters unexpected financial difficulties.

• Venture Capital Fund: A group of experienced investors, Michael and Lisa, decide to create a fund to invest in promising technology startups. They establish a limited partnership, with Michael and Lisa serving as the General Partners. They are responsible for identifying, vetting, and managing investments in the startups, bearing unlimited liability for the fund's operations. Large institutional investors, such as university endowments or pension funds, become Limited Partners, contributing capital to the fund. These institutions benefit from the expertise of Michael and Lisa, receive returns on their investment, and their liability is capped at their initial contribution, without needing to participate in the complex decision-making of which startups to fund.

• Family Farm Expansion: The Miller family owns a large agricultural business. The parents, John and Mary, have always managed the farm. They want to expand operations by purchasing new land and equipment but need additional capital. Their adult children, who have other careers, want to support the family business financially without taking on management duties or personal liability for farm debts. They structure the business as a limited partnership. John and Mary remain the General Partners, making all operational decisions and bearing unlimited liability. Their children become Limited Partners, investing capital to fund the expansion. This arrangement allows the children to contribute financially and share in profits while protecting their personal assets and not having to manage the daily farm operations.