A Basic Definition of Limited Partnership (2022 Update)

limited partnership

Courage is a major component to the entrepreneurial spirit. Quite simply, not everyone has the constitution required to start their own business, let alone to do it successfully. It often takes years of hard work, market research, and just plain luck in order for a new business to thrive. While the rewards can be unparalleled, the risks are enough to deter even the boldest gamblers. When your own livelihood is dependent on your business generating a substantial profit, you certainly have a lot of skin in the game. One avenue that many use in order to avoid potential pitfalls and ease their entrepreneurial stress is the formation of a limited partnership.

Maybe you have a co-worker who shares your vision. Perhaps you have a friend or family member who believes in your business plan. Whatever the reason may be, going into business with a partner can make a lot of sense. This business structure can allow you to divide up tasks and focus on your own individual strengths. A shared investment also means that you may set yourself up with a bit of breathing room. If all of that sounds appealing, then you may want to read on for a 2022 limited partnership definition.

limited partnership

A Useful Limited Partnership Definition

Commonly referred to in shorthand as an “LP,” a limited partnership occurs when two or more partners endeavor on a business venture. In a limited partnership, one individual must be designated as the managing partner. In that role, they are tasked with overseeing the business on a day-to-day level. Limited partners, while invested in the business, do not have a stake in its management.

While the title of “Managing Partner” may have an aesthetic appeal, it is not without its drawbacks. While a managing partner is essentially the “boss” and gets to make the bulk of the decisions, they can also be pinned with unlimited liability for debts incurred by the business. For their part, limited partners can only be found liable to the limits of their investment.

The Internal Revenue Service (IRS) views limited partnerships as “pass-through” entities. That means that your business will not pay taxes on its profits. Instead, the partners will only be taxed on their personal income or salaries.

In order to form a limited partnership, you will need to make a filing with your state’s Secretary of State office. While states can differ on how they govern limited partnerships, they generally are not subject to stringent reporting requirements.

A Limited Partnership is Not a Limited Liability Partnership

In the context of the business world, there are typically three modes of partnership: general partnerships, limited partnerships, and limited liability partnerships. A general partnership is typically an informal relationship that occurs whenever two or more individuals launch a business together. A business will remain under that distinction until they add an additional layer of legality by establishing a limited partnership or limited liability partnership.

While they sound similar in name, a limited liability partnership–or LLP–has some key differences from a limited partnership. In an LLP, all partners have limited liability. All partners in an LLP can also share business management duties. Because of their liability structure, LLPs are popular among service professionals such as doctors and lawyers. Since an LLP means that a partner cannot be found liable for another party’s negligence, these structures make sense for such industries. 

An LLP is also deemed a “pass-through” entity for IRS purposes. Similarly to an LP, you must make your LLP filings with your local Secretary of State office. It is also worth noting that LLPs are not available in all states, but, conversely, some states (California and Nevada, for example) require them in place of LLCs for licensed professionals. 

Does a Limited Partnership Suit Your Business Goals?

Whether or not you decide to form a limited partnership is dependent on a number of factors. Does the idea of being a managing partner appeal to you? If so, you need to be prepared for the responsibilities–and potential liabilities–that can come with that role. Maybe you are a professional providing a service that merits the formation of an LLP? If so, you will want to talk with your business partners about such an agreement. On a more simple level, you can also draft a profit sharing agreement for a general partnership, so as to add a legally-binding document to that relationship.

Regardless of which path you choose, there is an easier way to file your business documentation. At the Corporation Center, we understand and value your time as an entrepreneur and business owner. For this reason, we offer easy-to-complete web forms for business documentation filings in all 50 states. No matter what your grand business vision may be, we can help you get there. To learn more, contact one of our friendly customer service representatives today.