In this article, you will learn what is the meaning of LP. An LP exists when two or more partners go into business together, but the limited partners are only liable up to the amount of their investment. An LP is defined as having limited partners and a general partner, which has unlimited liability.
What is the Meaning of LP?
LP stands for a limited partnership. LP—not to be confused with a limited liability partnership (LLP)—is a partnership made up of two or more partners. The general partner oversees and runs the business while limited partners do not partake in managing the business. However, the general partner of a limited partnership has unlimited liability for the debt, and any limited partners have limited liability up to the amount of their investment.
A limited partnership is required to have both general partners and limited partners. General partners have unlimited liability and have full management control of the business. Limited partners have little to no involvement in management, but also have liability that's invent limited to their LP.
What are the Pros and Cons of LP?
The key advantage to an LP, at least for limited partners, is that their personal liability is limited. They are only responsible for the amount invested in the LP. These entities can be used by GPs when looking to raise capital for investment. Many hedge funds and real estate investment partnerships are set up as LPs.
Limited partners also don't have to pay self-employment taxes as they are not active members of the business. LPs are pass-through entities, meaning the entity files a Form 1065. and then partners receive Schedule K-1s that they use to include their portion of the income or loss on their own personal tax returns.
On the downside, LPs require that the general partner have unlimited liability. They are responsible for 100% of management control but also are on the hook for any debts or mishandling of business dealings. As well, limited partners are only allowed limited involvements in operations 。 If their role is deemed non-passive, they lose personal liability protection.
What Is a Limited Partnership in Business?
Businesses that form a limited partnership generally do so to own or operate a set of specific assets, such as a real estate investment partnership or LP for managing oil pipelines. One party (the general partner) has control over the assets and management responsibilities, but are also personally liable. The other party (limited partners) are generally investors whose personal liability is limited to their investment.
Bottom Line
Limited partnerships are generally used by hedge funds and investment partnerships as they offer the ability to raise capital without giving up control. This article is about what is the meaning of LP.
