In business, there are four types of partnerships: limited liability company partnership (LLC), limited liability partnership (LLP), general partnership (GP) and limited partnership (LP). The last, an LP, is not very common among small businesses when compared to an LLC, for example.
But what is a limited partnership, exactly? Why is it less popular? And who should use it — regardless of their business size?
Defining a Limited Partnership
An LP is an ownership arrangement consisting of at least one general partner and one limited partner. General partners manage the business and are personally responsible for its debts. Limited partners share ownership of the business but stay hands-off in daily operations. The liability of limited partners — sometimes called silent partners — is limited to the amount they invest in the business.
LPs are best suited for business founders who want to run their company themselves but still need funding. These owners typically take on the role of the general partner because they’re likely prepared to assume most of the liabilities and responsibilities of their business.
Exploring the Pros and Cons
Like other types of business partnerships, LPs have their advantages and disadvantages. They offer several benefits, such as:
- Limited liability for investors/partners
- Ease of replacing investors/partners
- Ease of scaling up due to readily accessible cash infusions
- Access to knowledge, insight and support from investors/partners
Disadvantages of LPs can include:
- Heavy liability for general partners
- Potential taxation of business profits as personal income
Choosing a Partnership
Deciding on a structure is an important step when starting a business, but there’s no “wrong” choice. Knowing what is a limited partnership, along with the other partnership options, will help you choose the structure best for you and your business goals.