Limited Partnership (LP)

A limited partnership (LP) is a partnership in which there must be at least one general partner who has unlimited personal liability, and at least one limited partner whose liability is limited to the investment he or she has made in the business.

Limited partners are really "silent partners" who make an investment of capital in the way that a passive shareholder does in a large, publicly traded corporation. Along with the positive aspect of limited liability, limited partners have a negative to contend with, in that they are prohibited from making day-to-day management decisions. Because all of the owners usually want to participate in the management of the business, this is not a suitable form in most cases.

On the other hand, the fact that limited partners cannot participate in management means that this form can be useful for estate planning. Parent/owners who don't want to lose control of the business, but who want to reduce the size of their taxable estate, can transfer ownership shares to children in the form of limited partnership interests. (Actually, the same objectives can be accomplished with an LLC, but in that case all of the owners enjoy limited liability for the business's debts. Both objectives are discussed in more detail below, in the context of the LLC.)

Because the LP is not a taxpaying entity, losses from the business can be passed on to the owners' personal tax returns, where they can "shelter" or offset other passive income that the limited partners might have. The general partner's losses are not usually considered passive, so they can be used to shelter other income up to the value of the partner's investment in the partnership.

The LP can represent an effective shield for the owners' business interests against the claims of the owners' personal creditors. In many states, this can also be achieved in the LLC (but not in the corporation or LLP). In states where this is not possible in the LLC, the LP may represent a viable alternative to the LLC under the right conditions.

Finally, states are beginning to allow the LP to register as an LLLP (limited liability limited partnership), in which all of the owners, including the general partner, have limited liability. This form is different from the LLP. The entity otherwise continues to be subject to the state's limited partnership law (usually the Revised Limited Partnership Act). This change will bolster the use of the limited partnership as an alternative to the LLC.

2003, CCH INCORPORATED.

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