Definition of limited partnership
limited partnership (plural limited partnerships)
- (law) A form of partnership similar to a general partnership, except that in addition to one or more general partners and one or more limited partners.
A limited partnership is a form of partnership similar to a general partnership, except that in addition to one or more general partners (GPs), there are one or more limited partners (LPs). It is a partnership in which only one partner is required to be a general partner.
The GPs are, in all major respects, in the same legal position as partners in a conventional firm, i.e. they have management control, share the right to use partnership property, share the profits of the firm in predefined proportions, and have joint and several liability for the debts of the partnership.
As in a general partnership, the GPs have actual authority as agents of the firm to bind all the other partners in contracts with third parties that are in the ordinary course of the partnership's business. As with a general partnership, "An act of a general partner which is not apparently for carrying on in the ordinary course the limited partnership's activities or activities of the kind carried on by the limited partnership binds the limited partnership only if the act was actually authorized by all the other partners."
Like shareholders in a corporation, LPs have limited liability, meaning they are only liable on debts incurred by the firm to the extent of their registered investment and have no management authority. The GPs pay the LPs a return on their investment (similar to a dividend), the nature and extent of which is usually defined in the partnership agreement. General Partners thus carry more liability, and in cases of financial loss, the GPs will be liable.
Limited partnerships are distinct from limited liability partnerships, in which all partners have limited liability.
For a list of types of corporation and other business types by country, see Types of business entity.
- United States
In the United States, the LP organization is most common among law firms, accounting firms, film production companies, finance firms and real estate investment projects or in types of businesses that focus on a single or limited-term project. They are also useful in "labor-capital" partnerships, where one or more financial backers prefer to contribute money or resources while the other partner performs the actual work. In such situations, liability is the driving concern behind the choice of LP status. The LP is also attractive to firms wishing to provide shares to many individuals without the additional tax liability of a corporation. Private equity companies almost exclusively use a combination of general and limited partners for their investment funds. Well-known limited partnerships include Enterprise GP Holdings, Blackstone Group, Bloomberg L.P. and CNN.
Prior to 2001, the limited liability enjoyed by LPs was contingent upon their refraining from taking any active role in the management of the firm. However, Section 303 of the Revised Uniform Limited Partnership Act eliminates the so-called "control rule" with respect to personal liability for entity obligations and brings limited partners into parity with LLC members, LLP partners and corporate shareholders.
The 2001 amendments to the Uniform Limited Partnership Act also permitted limited partnerships to become Limited Liability Limited Partnerships. Under this form, debts of a limited liability limited partnership are solely the responsibility of the partnership, thereby removing general-partner liability for partnership obligations. This was in response to the common practice of naming a limited-liability entity as a 1% general partner that controlled the limited partnership and organizing the managers as limited partners. This practice granted a limited partnership de facto limited liability under the partnership structure.
- United Kingdom
In the United Kingdom limited partnerships were governed by the Limited Partnerships Act 1907 which is now repealed. A new section in the Partnership Act 1890 replaces the 1907 Act. However, English law and Scottish law are distinct on partnerships. A new section in the Partnership Act 1890 replaces the 1907 Act.
In English law, limited partnerships are not legally separate entities: the partners are jointly and severally liable and any lawsuits filed are filed against the partners by name. There has been discussion over whether limited partnerships operating under English law should be made separate legal entities in the same way as limited liability partnerships are. The Law Commission report on partnership law LC283 suggests that creation of separate legal personality should be left as an option for the partners to decide upon when a partnership is formed. There are concerns that automatically making partnerships separate legal entities would restrict their ability to trade in some European countries and also expose them to different tax regimes than expected.
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