Definition: Limited partners are partners in a partnership who have no personal liabilities tied to the business beyond their original investment. In other words, limited partners are protected from third party creditors and plaintiffs because they have a limited liability stake in the partnership.
What Does Limited Partner Mean?
This means that if the business defaulted on a debt or a customer sued for damages, the limited partners could not be held personally responsible. The creditors and customers could only sue the business and the not the LPs individually.
This is the same type of protection that corporations provide for their shareholders. The law views the corporation as a different entity than the shareholder, so a creditor doing business with the corporation cannot sue the shareholder for company debts.
Although limited partners enjoy limited liability protection, it comes at a cost. LPs cannot vote or take substantial leadership roles in the limited partnership. They are viewed like shareholders in a corporation—simply investors who have no active role in the business. In fact, the courts have stripped some LPs of their protection because they had active roles in the company leaders. The courts determined that these partners were not limited in nature and thus were reclassified as general partners. Every LP must have at least one general partner.
Ted, Greg, and Jeff decide to form the Brothers, LP with two of his friends. Brother, LP is real estate firm that buys and sells residential real estate. Jeff actively manages the business and is deemed to be the general partner. This means that Jeff has unlimited liability. Neither Ted nor Greg has any active role in the partnership, so they are both deemed to be limited partners.
About a year later, Steve, a client, finds black mold in their home that Jeff sold to them. Steve sues Brothers, LP and wins. Steve can also sue Jeff personally because he is a general partner, but he can’t sue Ted or Greg personally because they are limited partners. The most Ted or Greg can lose is their stake in the partnership.