A limited partnership is a partnership with two kinds of partners: limited partners, who provide financial backing and have little role in management and no personal liability, and general partners, who are responsible for managing the entity and have unlimited personal liability for its debts. It is often used when people need funding for a business, or when they are putting together an investment in a real estate development.
A limited partnership requires a written agreement between the managing general partner or partners, and all of the limited partners. Each limited partner makes an investment of funds into the partnership and is supposed to receive a pre-determined share of the profit. The limited partners also receive the tax benefit of a “passed through” loss (a personal income tax deduction for part of the loss) during the development stages of the partnership when the expenses exceed any receipts. There is often a provision for eventual buy-out of the limited partners by the general partners.
Only the general partners are allowed to participate in the management decisions of the partnership. Limited partners do have the power to vote to remove the general partners, although usually the partnership agreement is structured so that such removal is virtually impossible unless the general partner in question has committed fraud.
While sharing in profits and tax benefits, the limited partner is “limited” in potential loss, since the only risk of loss is his/her investment, and the general partners alone are subject to claims, debts in bankruptcy and lawsuits against the partnership. Limited partnerships must file their name and names and addresses of general partners with the Secretary of State or other designated officer in the state in which the partnership is created so the public can find out who the responsible parties are.