A limited partnership is an agreement between two or more people running a business together with varying levels of liability and ownership. Essentially, the more liability you have in a limited partnership, the more say you have in how the business operates.
In a limited partnership, there are both general and limited partners:
- General partners are liable for all debts and obligations of a business.
- Limited partners are only accountable for the amount they’ve invested in a company.
As with every business type, a limited partnership comes with both advantages and disadvantages.
Advantages of limited partnerships
- Growth is scalable. With a solid business idea and plan, and a team of general partners playing a more active role than limited partners, limited partnerships are relatively easy to scale up in size.
- Limited partnership shares are considered securities. In other words, shares of a limited partnership can be sold to help raise capital — without going public.
- Limited partners have limited liability for losses. As a limited partner, you are only accountable for the amount of money you’ve chosen to invest in the business. So, if your company gets sued, you won’t be responsible for paying hefty funds like general partners. You get to decide how involved you are in the business, both physically and financially.
- Partners can be quickly replaced. If a limited partner decides to leave the business suddenly, management can easily and quickly find a replacement for them. This not only prevents turnover issues but also makes limited partnerships more attractive to venture capitalists.
- Two heads are better than one. Having constant input and support is invaluable in business. While you can certainly run a company on your own, it’s always helpful to have another perspective.
Disadvantages of limited partnerships
- General partners are personally responsible for business debts and risks. As a general partner, all the debts and risks fall onto you. If someone slips up, or your company is sued, you’re the one accountable for the consequences.
- Profits are treated as personal income. That being said, you’ll have to file tax returns based on your profits.
- Fundraising is difficult. Limited partnerships automatically come with liabilities, meaning not many people will want to invest and assume a share of debt. This makes funding especially challenging.
Further information
What Is a Limited Partnership? (uschamber.com) (source of the information above)