Limited Partnership Definition and Legal Meaning

On this page, you'll find the legal definition and meaning of Limited Partnership, written in plain English, along with examples of how it is used.

What is Limited Partnership?

(n) A limited partnership is the type of partnership in which a section of partners have contributed towards the capital without any management authority in the partnership with a limited liability and pre-fixed percentage of return on their investment.

History and Definition of Limited Partnership

A limited partnership (LP) refers to a business arrangement where two or more people own a company, but only one individual or entity is an active partner while the rest contribute capital. The passive limited partners offer financing and share in the profits or losses but do not participate in management decisions. In contrast, the general partner controls the day-to-day operations, has unlimited liability over business obligations, and is liable for any legal actions.

The concept of LPs emerged in the early 20th century as a way for investors to contribute funds to businesses without assuming full liability or management responsibilities. The structure allows the owners to limit their exposure to financial obligations, which cannot exceed their capital contributions. LPs are popular in various industries, including construction, real estate, and film production.

Examples of Limited Partnership

  1. John and Mary invest in a small company that sells handmade crafts. They contribute capital and share in the profits without actively managing the business. The business is a limited partnership.

  2. Company ABC requires funding to expand its software development division. It creates an LP, where the venture capital firm invests $50 million as a limited partner, while the company maintains its ownership and active general partner status.

  3. The real estate market is attractive, and Lisa wishes to invest in the development of high-end apartments. She partners with a general contractor who contributes expertise and management skills as a general partner, while Lisa offers capital as a limited partner.

Legal Terms Similar to Limited Partnership

  1. General partnership: all partners share equal liability and management authority.

  2. Limited liability partnership (LLP): partners have limited liability, but all can actively participate in management decisions.

  3. Corporation: a legal entity with the same rights and obligations as a person, distinct from its owners.

  4. Sole proprietorship: a business entity where an individual owns and manages the business alone.

  5. Joint venture: an agreement in which two or more parties undertake a single business transaction for mutual benefit.