What Is a Limited Partnership?

An analysis of the key risks and benefits of limited partnerships as to formation, management, legal liability, profit-sharing, and fiduciary duties.

A limited partnership is a business entity that consists of at least one general partner and one or more limited partners. Typically the general partner is an experienced businessperson who provides both financial resources and daily management skills to your limited partnership. A limited partner is an individual or business that offers only capital or financial resources to that limited partnership. State laws govern limited partnerships and many state laws have enacted all or part of uniform partnership laws. An analysis of the key risks and benefits of limited partnerships as to formation, management, legal liability, profit-sharing, and fiduciary duties, can help you decide if this is the right business entity for you.

Requires Formal Creation of Business Entity

General partnerships may be created informally through the equal sharing of management duties, business capital, and profits and losses. Yet limited partnerships require greater written formality with a required certificate of partnership which identifies the general and limited partners. This certificate must be filed with the relevant state department, normally the secretary of state’s office. Limited partners may also sign on to articles of limited partnership to further identify and assign clear partnership duties and benefits.

Management Roles

Typically in  a general partnership, each general partner possesses an equal right to manage business affairs and the partners need to collaborate effectively to achieve agreed-upon business outcomes. In a limited partnership, only the general partners operate this business enterprise, establishing business strategies and carrying out business obligations and objectives. Unlike general partners, limited partners are not involved in managing the enterprise and participate only through the provision of financial investment. A limited partner who subsequently becomes involved in directing or operating the business risks losing limited legal liability and may take on additional fiduciary duties.

Exposure to Liability

In a limited partnership, a partner’s legal liability may flow from that person's actual control over business operations. A general partner is subject to unlimited personal liability because of their authority over daily business decision-making and other limited partnership activities. The partner’s personal assets along with any partnership assets are at risk. If there is more than one general partner in a limited partnership, general partners are jointly and severally liable for the business conduct of their fellow general partners. Joint and several liability means that general partners are legally responsible not only for their own conduct, but for the business acts of the other general partners in the limited partnership. As the name implies, limited partners possess limited legal liability and largely risk only their capital contributions to their limited partnership. However, a limited partner who actively manages the business or agrees to provide a personal guarantee for business loans may be held personally liable, like a general partner.

Allocates Profits at Varying Levels

Unlike a general partnership, general and limited partners in a limited partnership do not share profits and losses equally. Traditionally, each partner’s profits and losses are determined by the value or percentage of any capital contributions made to the business. General and limited partners could decide to deviate from this usual approach through an agreement which allocates business profits and losses differently, depending upon their agreed-upon profit and loss measures.

Mandates Distinct Fiduciary Duties

In a limited partnership, certain partners may owe duties of trust, known as “fiduciary duties.” Your fiduciary duties will vary depending upon whether you are participating as a general or a limited partner in your limited partnership. State statutory law, judicial precedent, and the terms of your partnership agreement will further determine what fiduciary duties, if any, you may owe to others in your limited partnership. Typically general partners owe fiduciary duties to their fellow partners and to the business entity, including the duty of good faith and fair dealing, loyalty, reasonable care, accounting, and disclosure. Partners possessing fiduciary duties may also be subject to greater legal liability for failing to comply with these obligations. Non-managing limited partners normally do not owe fiduciary duties to their limited partnership. As with legal liability, if limited partners decide to direct or operate their limited partnership, they must comply with the same fiduciary duties as general partners.

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