What Is a Limited Partnership?

A limited partnership is a type of business entity consisting of at least two types of partners: one or more general partners who manage the business and assume full legal responsibility and one or more limited partners who invest capital but retain limited liability.

Unlike corporations or general partnerships, this model allows for a clear separation between operational control and financial risk.

For this reason, it is widely used in sectors such as private equity, real estate, and investment funds. In this article, we will analyze the structure, figures involved, and use cases of LPs in detail, with a particular focus on the international context. 

Structure of a Limited Partnership

To understand what is a limited partnership​, we need to analyze its structure. This type of company has two kinds of roles: the General Partner and the Limited Partners.

The General Partner is the actual manager of the company: he makes decisions, enters into contracts, and assumes legal responsibility for his actions. Limited Partners, on the other hand, can be considered passive investors. They contribute capital to the business and receive a share of the profits but do not participate in day-to-day operations, and their liability is limited to the capital they contribute to the company.

Key Features of a Limited Partnership

LPs have certain characteristics that differentiate them from other corporate structures, making them very popular. First of all, they allow for pass-through taxation, meaning that profits are not taxed at the corporate level but redistributed to the partners who declare them as their own income. Furthermore, as mentioned above, there is a clear separation between operational control (entrusted to GPs) and limited liability partnership for LPs, who act as financiers.

The popularity of LPs is due to their widespread international acceptance, although some requirements for formation may vary depending on the jurisdiction. Generally, to form an LP, it is necessary to legally register the entity, draw up a partnership agreement, and, in many countries, file specific documents with the relevant authorities.

What Is a Limited Partner?

So, essentially, what is a Limited Partner? A Limited Partner is a financial partner who does not have any operational control over the company. Decision-making and legal responsibility lies with the General Partner.

LPs are not liable for the company’s debts or obligations beyond the amount of capital contributed, which means that their risk is limited to their initial investment.

What Is a Limited Partner in Business?

Outside of PE, what is a limited partner in business refers to an investor who contributes liquidity to a partnership but, unlike a General Partner, does not have operational control (general partner vs limited partner​).

LPs are particularly common in family businesses, real estate transactions, and joint ventures, given their need for capital without additional managers to run the operations.

LPs are entitled to a percentage of the profits in proportion to their investment, have access to certain company information, such as financial statements and reports, and may withdraw from the partnership under the terms set out in the initial agreement.

What Is a Limited Partner in Private Equity?

In PE, what is a limited partner in private equity refers to an investor who provides capital to a fund managed by a GP. They are considered passive because they do not manage the company themselves, leaving this task to the GP.

LPs therefore contribute to the fund’s growth by providing the liquidity needed to make investments. In return, they receive a stake of the profits proportional to their cash contribution.

They are very common in pension, sovereign wealth, and endowment funds due to their potential for higher investment returns.

Formation and Legal Requirements

Setting up an LP involves a variety of formalities that vary from country to country, but it is a fairly uniform process in most jurisdictions.

• Drafting a partnership agreement: This is the formal document that establishes the LP and defines the respective roles, responsibilities, and duration.
• Filing a certificate of incorporation: Once the partnership agreement has been drafted, it must be filed with the local business registry.

LPs generally fit into a pass-through tax regime relatively simply with profit being taxed directly at the partner’s level. However, certain jurisdictions (e.g., Luxembourg) may make exceptions or preferential treatment available to investment funds.

Limited Partnership vs. Other Business Structures

An LP stands apart from other business structures in a few key ways. Unlike a General Partnership, where all partners share unlimited liability and actively manage the business, an LP assigns that role—and the associated risks—to the GP. 

LLCs, on the other hand, allow a more flexible management structure that does not depend on specific roles. However, investment funds prefer LPs because they facilitate capital raising while keeping control in the hands of a single manager (GP).

As regards the latter structure, Corporations follow strict rules with formal governance (board of directors, shareholders’ meetings) and often incur double taxation.

Use Cases and Applications

Businesses widely use limited partnerships in contexts where they need to separate active management from inactive investment. PE and venture capital funds are among the most common examples, where limited partners (such as pension funds or foundations) provide capital, and general partners manage operations. Other areas include real estate funds, where LPs participate financially without managing assets, as well as in international joint ventures, particularly when partners originate from different countries. This structure is highly scalable and suitable for both small-scale initiatives and complex institutional vehicles, and it is also frequently adopted as a foundational setup for private equity exit strategies.

Advantages and Disadvantages

Like any business structure, limited partnerships have advantages and disadvantages. The first and most obvious benefit is limited liability: while the general partners manage the business, the limited partners provide the liquidity needed to operate.

The second advantage is also clear: easy access to capital. This type of business structure appeals to investors who do not want to get involved in running a business but want a share of profits.

Potential disadvantages, on the other hand, are undoubtedly the complexity involved due to the formal documentation required and the high compliance costs. 

Role of Legal and Financial Advisors

LPs are increasingly turning to PE consulting services for assistance with corporate structuring and compliance documentation. However, legal and regulatory assistance is not the only service provided. Financial advisors also manage cash flows by planning capital contributions, monitoring performance, and managing distributions to LPs.

For cross-border companies, both types of advisors play an even more critical role, as they must coordinate to resolve regulatory conflicts, manage different tax treatments, and ensure consistency across operating locations.

Common Misconceptions About Limited Partnerships

Despite their widespread use, there are still misunderstandings about LPs and how they work. The most common misconception is that limited partners are involved in the company’s day-to-day management. This is not true, as we have seen, their function is that of passive investors.

Very often, LPs are associated with “anonymous” companies or companies set up for tax evasion. The reality is quite different, with LPs being required to comply with transparency and disclosure obligations.

Finally, it is important to clarify that limited partners are not personally liable for the partnership’s debts unless they exceed the limits of their position.

FAQs

What is a limited partnership?

An LP is a corporate structure in which a general partner governs the company, and one or more limited partners contribute funds with limited liability.

What is a limited partner?

A Limited Partner is an investor liable to the extent of their shareholding. They contribute capital but do not participate in the management of the business.

How are limited partnerships taxed?

In most jurisdictions, LPs benefit from pass-through taxation. This allows profits and losses to be reported on personal tax returns.

Can a limited partner lose money?

Yes, but not beyond the amount invested.

What is the difference between a general partner and a limited partner?

General Partners are operating partners and fully liable, while Limited Partners are investors liable only for the capital they provide.

Are limited partnerships used globally?

Yes, they are used worldwide, especially in fund structuring, real estate, and joint ventures.

References

Investopedia. (2024). Limited Partnership (LP): What It Is, Pros and Cons, How to Form One.
https://www.investopedia.com/terms/l/limitedpartnership.aspinvestopedia.com

Carta. (2024). Limited Partner (LP): Responsibilities & Role in Private Funds. 
https://carta.com/learn/private-funds/structures/limited-partner/carta.com+1carta.com+1

Investopedia. (2024). What Is the Structure of a Private Equity Fund?.
https://www.investopedia.com/articles/investing/093015/understanding-private-equity-funds-structure.aspinvestopedia.com+1investopedia.com+1