What is a Limited Partnership (LP)?

Business partnerships can be either general or limited, and as far as tax codes are concerned, exist as long as profits, losses and costs of a business are shared. While general partnerships are more common, limited partnerships are a popular method of raising capital from passive investors who prefer to not be involved in day-to-day business operations. Limited partnerships (LPs) have two sets of partners, namely one or more general partners who have personal liability and one or more limited partners who are not liable for debts.

Business owners who do not want the liability for the debts incurred by the corporation prefer this option. Limited partners usually do not play any role in the day-to-day management of the company.

Pros of Limited Partnerships:

In the event of a lawsuit the names of the limited partners cannot be included in the list of defendants. Limited partnerships are quite common in businesses such as restaurants and other business ventures where there is high financial risk. The limited partners will only provide the necessary funds, and stay aloof from the business operations and management. Due to this lack of involvement in management of business, LPs are also called “passive investors”. In order to enter limited partnership, partners need to file the necessary formation documents with the concerned state agency along with the state filing fees applicable.

Cons of Limited Partnerships

Limited partnerships do have downsides:
By InvestorGuide Staff

Copyrighted 2019. Content published with author's permission.

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