A Limited Partnership (LP) is a specific type of business structure that includes at least one general partner and one or more limited partners. This arrangement allows for a combination of investment and management roles, where the general partner manages the business and is personally liable for its debts, while the limited partners contribute capital and share in the profits but have limited liability and do not participate in day-to-day management.
In a Limited Partnership, the general partner has the authority to make decisions and run the business, taking on full responsibility for any obligations incurred by the partnership. This means that if the business incurs debts or is sued, the general partner’s personal assets may be at risk.
On the other hand, limited partners enjoy protection from personal liability beyond their investment in the partnership. This means that if the business fails or faces legal action, limited partners cannot lose more than the amount they invested. However, limited partners must refrain from participating in the management of the business; if they do engage in operational decisions, they risk losing their limited liability status.
Example: A common scenario for a Limited Partnership involves a real estate investment. A general partner might be a real estate developer who manages the property, while several limited partners provide funding for the project. The limited partners enjoy the benefits of profit sharing without the risk of losing more than their initial investment, whereas the general partner handles the operational risks and decisions associated with the property.