A limited partnership, like a general partnership, occurs when two or more persons join together to form a business.  In this structure, each partner contributes capital, property, labor, or skill to the partnership and in return, receives part of the profits or losses of the business.   By forming a partnership, both partners have a greater amount of start-up capital than a sole proprietorship. Also, the assets that are placed in the name of the partnership may often be used directly as collateral for business loans. The partnership is based on an agreement, whether that agreement is a formal document or not.  In some cases, this agreement can be oral, which is highly discouraged.

In a limited partnership, there is usually only one general partner, although there can be more, while the other partners are called limited partners with limited duties and liabilities. In a limited partnership, the general partner(s) have full management responsibility and control of day-to-day business. The general partner runs the business and makes decisions. A limited partner cannot incur obligations on behalf of the partnership and does not participate in the daily operations and management of the partnership. In fact, a limited partner's participation is usually limited to initially contributing capital and later receiving a proportionate share of the profits. A limited partner is essentially a passive investor.

The main advantage of limited partnerships is to allow the general partner the freedom to run the business without interference and give the limited partners diminished or severed liability if things go wrong.  This is different from a general partnership, where the partners share the liability jointly.  Although limited partners may seek greater involvement in day-to-day operations, they do so at some risk. If they begin to assume more control over operations, it is altogether possible that they may be seen as general partners in the eyes of the law, with its accompanying liability risks.

A limited partnership enjoys the tax benefits common to general partnerships and sole proprietorships.  Significantly, the limited partnership allows the partners to avoid the “double taxation” that many corporations must pay.  Also, income from a partnership is taxed at personal income tax rates. This could prove to be a disadvantage, depending on the individual tax situation of each partner.

Unlike in a general partnership, where a disagreement may arise over the operations of the partnership, disagreements rarely arise in a limited partnership.  This is due to the fact that the decisions made in a limited partnership are generally made by the general partner and the limited partners have little say in the process.  However, complications can arise if there is more than one general partner or some of the limited partners wish to take on a more active role in the partnership.

A major disadvantage of a limited partnership is that all of the partners are not protected from liability. While the general partner has all the power, he or she also bears the lion's share of liability. A limited partner's liability is capped at the amount of his or her financial contribution to the partnership. Should a truck that belongs to a limited partnership accidentally kill someone, the damaged party could go after the general partner's personal assets, but he or she would be limited to the limited partner's capital contribution. Again, this disadvantage can be partially overcome with a comprehensive partnership agreement before entering into the partnership.

There are a few added complications associated with limited partnerships. Limited partnerships, unlike general partnerships, have to file with the Secretary of State. The costs are relatively high to do so. In fact, the partnership must file with the Secretary of State each time partners enter or leave the partnership.

Numerous examples of limited partnerships exist.  A major example in the United States is a big law firm, in which there is one general partner making the operational decisions and other limited partners have contributed capital to help start the law firm.

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Sole Proprietorships
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Limited Partnership
C Corporations
S Corporations
Limited Liability Companies
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