Definition: A limited partnership (LP) is a partnership that has both general and limited partners. An LP must have at least one general partner and can have an unlimited number of limited partners.
What Does LP Mean?
The general partner assumes all management and responsibilities of the business and also has unlimited liability. This means the partner can be held personally responsible for business debts and damages brought on by plaintiffs. The main reason why general partners are treated this way is because they are viewed as part of the company. Since they make all of the business decisions, it’s kind of like the company and the general partners are the same entity.
Limited partners, on the other hand, cannot take any active role in running the business and benefit from limited liability. This means that they can only lose their investment in the partnership. No personal assets are at stake for these partners. Limited partners enjoy the benefits of limited liability because they are viewed as passive investors without any real say in how the company is run similar to corporate shareholders.
Like all partnerships, LPs are passive through entities that don’t pay taxes at the entity level. In other words, the partnership income or losses are divided up between the partners and reported on the partners’ individual income tax returns. The company itself does not pay any taxes or report any taxable income to the government.
Flow-through entities have a key advantage to corporations because they aren’t at risk for double taxation when owners want to withdrawal money from the business. Instead, the partners report all of the income and distributions are not taxes at an additional rate like dividends from a corporation.