What Is a Limited Partnership? Definition and Why to Form One

Choosing a business structure is an important part of starting a business, and it’s not a one-size-fits-all process. Each business has its own needs, goals, and membership structure. For entrepreneurs going into business with one or more partners, the responsibilities and obligations may not always be an even split.

That’s where a limited partnership can come in. Limited partnerships allow investors to participate in entrepreneurial ventures while limiting their role in company decisions, as well as their personal liability. Explore this important type of business structure in detail along with its advantages and drawbacks.

What is a limited partnership?

A limited partnership (LP) is a specialized form of business partnership owned by two or more people. At least one partner must be the general partner responsible for operational control of the business and bear unlimited personal liability for the company’s financial obligations. Other backers, or limited partners, provide funding without involving themselves in daily management responsibilities. Think of limited partners as essentially silent partners whose liability for business debts and obligations is limited to how much money they put into the business.

Limited partnerships are considered pass-through entities for all partners, general or limited. That means the profits and losses of the business pass through directly to partners. Partners then report their share of the partnership’s profits on their personal tax returns.

Limited partnerships vs. limited liability partnerships

It’s important not to confuse limited partnerships with limited liability partnerships (LLPs). In a limited partnership, the general partner has unlimited liability, while the limited partners have liability limited to the total extent of their investment. By contrast, an LLP provides limited liability protection to all partners. This shields each from personal responsibility for the business’s debts, as well as any professional negligence of other partners, while allowing all partners to actively participate in management. LLPs are commonly favored by professional service providers like law practices and accounting firms.

Limited partnerships vs. limited liability companies

Limited partnerships are also related to another popular entity type: the limited liability company (LLC). Both limited partnerships and LLCs are treated as pass-through entities for tax purposes, and they also contain liability-shield functions for ownership.

But there are a few key differences:

• All owners (called members) of an LLC receive personal liability protection.

• All LLC members are typically involved in the day-to-day running of the company—unless an alternative arrangement is spelled out in the LLC’s operating agreement.

• LLCs usually generate capital through outside investment in exchange for a membership stake in the company—which would afford the new member a greater deal of influence and involvement than a limited partner—or under a separate investor agreement. This can be a bit more complicated than with a limited partnership, which has a silent investor role built into the concept itself.

Limited partnership vs. general partnership: How do they compare?

1. Potential risk
2. Managerial involvement
3. Profit sharing and partnership agreements
4. Naming conventions
5. Tax treatment

In a general partnership, partners share liability and management responsibilities. Limited partnerships and general partnerships share historical roots in business law, but they are different legal entities with diverging approaches to risk, managerial control, and investment.

1. Potential risk

Unlike a general partnership where all partners share equal management rights and have unlimited personal liability for the business’s debts, a limited partnership creates two distinct partner classes. At least one general partner assumes full operational control and unlimited liability for partnership obligations, effectively putting their personal assets on the line for the business. Limited partners function primarily as financial backers—they contribute capital but don’t engage in day-to-day management. In exchange for this passive role, the liability of limited partners is capped at how much they invest in the venture.

2. Managerial involvement

General partnerships are often better suited for small, collaborative businesses where all owners want equal say in business decisions. Limited partnerships can be better for scenarios requiring large outside investment. The liability cap for limited partners may appeal to investors who want potential financial upside without day-to-day management responsibilities or high personal risk. Also, limited partnerships are generally not required to disclose the names of limited partners in state filings—which can be a plus for partners who wish to maintain some degree of privacy around their involvement with the venture.

3. Profit sharing and partnership agreements

In general partnerships, profit shares are typically calculated based on what the partnership agreement says. However, partnership agreements are not legally required when forming a general partnership. The default distribution model, without an agreement, is equal distribution among all partners regardless of capital contribution or degree of day-to-day involvement.

Limited partnerships are typically required to have a limited partnership agreement that outlines profit shares, usually with general partners taking a larger piece than their limited colleagues because of their more active managerial role and greater personal risk.

4. Naming conventions

General partnerships don’t need to refer to the partnership in the business name. However, most states require limited partnerships to include “limited partnership,” “LP,” “L.P.,” “Limited,” or “Ltd.” in the business name.

5. Tax treatment

Both general and limited partnerships are pass-through entities. This means they avoid the so-called double taxation typically levied against corporations, where profits are taxed once at the business level, and again on earnings distributed to owners. Limited partners can be exempt from self-employment tax, while general partners (in either a general partnership or limited partnership) are subject to that tax.

Advantages of a limited partnership

Forming a limited partnership has a number of benefits, including:

Liability protection for limited partners

So long as limited partners play by the rules and stay out of the partnership’s day-to-day affairs, they enjoy limited liability for the business’s debts only up to the amount they invested. Their personal assets, such as homes, vehicles, savings, and other investments, are safe from creditors or litigants with a claim against the partnership.

Investor appeal

Raising capital for a limited partnership often is easier than for other partnerships or types of businesses, such as LLCs and S corps. The limited liability protection of limited partnerships tends to attract risk-averse investors who have no interest in the challenges of actually running a business.

Taxes

Limited partners are exempt from self-employment tax, which is 15.3% of gross income, as of 2025. But this exemption depends on the limited partner understanding the boundaries of their role. Similar to the limited partnership’s liability protections, if limited partners involve themselves in the partnership’s daily business operations, they could lose this tax break.

Disadvantages of a limited partnership

Although limited partnerships offer a number of benefits, this business entity type can have drawbacks, including:

Heightened risk for general partners

General partners are subject to unlimited liability for the company’s debts and obligations. If creditors or litigants demand amounts that exceed the partnership’s assets, they could come after a general partner’s personal assets as well.

Formal formation requirements

The general partnership is the default structure for any business run by two or more individuals in the US. That means if you go into business with someone, even without a written partnership agreement, the law will treat that business as a general partnership. To form a limited partnership, you’ll need to file a certificate of limited partnership with your local Secretary of State’s office. The certificate fee varies by state, from as little as $10 in Arizona (plus $3 per page) to $1,000 in Florida. This document usually contains:

• The name of the partnership

• Contact information for a registered agent who can accept legal documents on the partnership’s behalf

• The name and address of each general partner

• The signature of a general partner, or someone authorized by the partnership to complete the certificate

Limits on investor influence

Although the passive role of a limited partner is attractive to many investors, some may want more say in how the partnership runs. But limited partners who involve themselves in the day-to-day operations of the partnership can lose both personal liability protection and favorable tax treatment.