Limited partnership (LP) is a type of partnership organization that limits the personal liability of some partners. In general partnerships, every partner remains personally liable for the debts and obligations of the partnership. The LP separates at least one general partner with unlimited personal liability from limited partners whose liability typically will not exceed their contribution to the partnership. LPs have been used since the 1800s as a way to allow some members to passively invest in a partnership without fearing reprisals for the actions of other partners. While limiting liability, LPs also keep the same flow-through tax treatment and much of the same contractual flexibility as a general partnership.
The operations of an LP differ from that of general partnerships or limited liability partnerships (LLP). In an LP, a limited partner often must keep a certain amount of distance away from the decision making of the corporation or otherwise may be treated as a general partner depending on the laws of the state. So, the general partners typically manage the partnership from big decisions to day-to-day operations. A limited partner potentially can become liable for expenses caused by their actions. Unlike general partnerships, an LP must be registered with the appropriate state agency for the partnership to be created, and the LP typically is governed by the partnership agreement which partners have flexibility in drafting. Also, in most jurisdictions, a limited partner can leave the partnership with the approval of other partners. Compare with Partnership, Limited Liability Partnership (LLP) and Limited Liability Corporation (LLC).
[Last updated in March of 2022 by the Wex Definitions Team]
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