What is a limited partnership (LP)?
A limited partnership (LP) is an association of one or more general partners together with one or more limited partners to conduct business for profit as co-owners. The most important feature of a limited partnership is the limited partner enjoys limited liability as long as he or she does not participate in the control of the partnership business. The general partners of the LP are the ones who are responsible for the obligations of the limited partnership.
General vs. Limited Partners
In a limited partnership, it is the general partner who remains liable for the debts and obligations of the entity. General partners are the operators who control and manage thee partnership, and are jointly and severally liable for all its debts and obligations. General partners are paid an additional management fee for their efforts.
Limited partners are not involved in the management of the partnership and a liable only up to the amount they invested in the partnership. That means that if a judgment creditor obtains a charging order against one partner, the order goes to that partner's share in distributions from the partnership, and not to the entire business. If limited partners take over some of these responsibilities, they lose their liability protection.
Corporate Partner Alternative
Another way to structure a partnership is substituting one individual partner for a corporation. This is a way to manage greater risk exposure, forming a corporation to serve as the general partner. A corporate general partner is protected from direct attack by a judgment creditor because the ultimate liability for the debts and obligations rests with the shareholders. By spreading share ownership, individual exposure is considerably reduced. In each of these situations, every type of partner benefits from the businesses profits, investment credits and tax benefits in addition to limiting their exposure to liability.
Getting Legal Help
If you need help deciding which business structure is best for you, speak with a corporate attorney to discuss your options.