What is a LP?
A Limited Partnership (LP) consists of at least one general partner who manages the business and is personally liable for debts, and one or more limited partners who contribute capital but have limited liability and cannot participate in management. LPs are commonly used for real estate investments, venture capital funds, film productions, and family investment vehicles.
How it Works
General Partner Role
The general partner manages day-to-day operations, makes business decisions, and has unlimited personal liability for partnership debts.
Limited Partner Role
Limited partners invest capital and share in profits but cannot participate in management. Their liability is limited to their investment amount.
Partnership Agreement
The partnership agreement defines profit sharing, capital contributions, voting rights, and procedures for adding or removing partners.
Advantages of a LP
Pass-Through Taxation
LPs avoid double taxation. All income passes through to partners' personal tax returns.
Investment Structure
Ideal for investment vehicles. Limited partners can invest without management responsibilities or personal liability.
Flexible Profit Sharing
Partnership agreements can customize profit and loss allocations among general and limited partners.
Disadvantages & Considerations
General Partner Liability
General partners have unlimited personal liability for partnership debts and obligations.
Limited Partner Restrictions
Limited partners cannot participate in management without losing their limited liability protection — known as the "control rule."
Tax Structure Deep Dive
LPs are pass-through entities — all income and losses flow through to partners' personal tax returns. General partners pay self-employment taxes on their share. Limited partners' share of income is generally not subject to self-employment tax. Partners receive Schedule K-1 forms annually.
Summary Framework
Pass-through taxation. General partners pay self-employment tax. Limited partners' income is generally not subject to self-employment tax.
Formation Roadmap
Choose a Partnership Name
Select a name that complies with state requirements, typically ending with "Limited Partnership" or "LP". Check availability with the Secretary of State.
Identify General and Limited Partners
Designate at least one general partner (manages operations, unlimited liability) and one or more limited partners (invest capital, limited liability).
File Certificate of Limited Partnership
Submit a Certificate of Limited Partnership with the state, identifying the general partner(s) and providing basic partnership information.
Draft Partnership Agreement
Create a comprehensive partnership agreement addressing capital contributions, profit/loss allocations, management rights, partner withdrawals, and dissolution procedures.
Structural Comparison Matrix
| Structure | Liability Protection | Tax Framework | Complexity | Ownership | Best For |
|---|---|---|---|---|---|
| LP | Limited partners only | Pass-through | Moderate | General + Limited Partners | Investment funds |
| LLC | Limited (all members) | Pass-through | Simple | Members | Small business owners |
Ongoing Compliance Requirements
Partnership Tax Return
File annual Form 1065 partnership tax return and provide Schedule K-1 to each partner reporting their share of income and deductions.
State Registration
Register the LP with the Secretary of State and file annual reports. Some states require disclosure of general partner information.
Frequently Asked Questions
Quick Facts
- Liability Protection Limited (for limited partners only)
- Taxation Pass-through
- Ownership General + Limited Partners
- Best For Real estate & investment funds
- Formation Cost $50 - $500
- Compliance Level Low
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