A limited partnership (LP) is partnership formed by filing a Certificate of Limited Partnership with the relevant state authority. An LP must have at least one general partner and one limited partner. In most cases, the limited partnership will have only one general partner and many limited partners.
General Partners
The general partners are responsible for running the company’s day-to-day operations and acting as the management for limited partners. The general partner for an LP can be an individual, corporation, limited liability company (LLC), trust, estate, another partnership, or any other legal or commercial entity.
Limited Partners
The limited partners contribute capital to the LP in exchange for an equity interest. The capital contributed is usually cash but can also include other property. The limited partners do NOT actively participate in the business operations and are shielded from personal liability for the actions of the company and its general partner. The most a limited partner could lose is the amount of their investment in the LP.
Example Limited Partnership Arrangement
ohn Smith is a hedge fund manager who wants to form a limited partnership (LP) to raise third-party capital. He forms an LP in the State of Delaware and appoints himself as the general partner. The partnership issues LP units to 20 different investors in exchange for cash contributions of $1 million from each investor. The limited partners do not actively participate in management or make investment decisions.
U.S. Federal Tax Consequences
The LP is not a taxable entity for federal tax purposes. The limited partnership files an annual Form 1065 (US Return of Partnership Income), which reports the partnership’s income, expenses, credits, and other tax items. The total amounts are then allocated to the partners and reported separately on a Schedule K-1 (Form 1065) for each partner. Each partner uses the information on Schedule K-1 to complete their income tax return.