A limited partnership is a business venture between two or more partners. The benefit of this type of partnership is that it offers partners limited liability protection in exchange for limited authority in management decisions or the day-to-day operations of the company. With this business form, limited partners can protect their personal assets from liability.
Limited Partnership Model
In a limited partnership model, there is at lease one general partner and at least one limited partner. The general partner or the limited partners may be persons or companies. The general partners are responsible for the day-to-day operations and management of the limited partnership. Such responsibilities may include making investment decisions, partnering with other companies, or entering into contracts for operational purposes. A general partner does not have the same liability protection as a limited partner.
While the extent of a limited partner's liability extends only to the amount of his contributed capital, or initial investment, in the partnership, a general partner's liability is unlimited. For instance, once the partnership's assets are used to pay creditors, any remaining company debts leave a general partner's assets vulnerable to meeting those debt obligations, while a limited partner can only lose the amount he initially contributed. Therefore, if the partnership is sued or goes into bankruptcy, a limited partner who only contributed $10,000 only risks the $10,000, while the general partner risks that amount along with his house.
Although limited partners have the protection of limited liability, having little authority or management power may be critical to a partner who has contributed a substantial amount of her savings to the partnership. In this form, partners must choose power or protection. While a limited partner may feel that she is taking a bigger risk by contributing a large sum of money, it is the general partner whose personal assets are vulnerable to creditors as well as his own initial investment.
Although the limited partnership may seem a harsh business form, it is one of the most popular forms of organization for private equity funds, hedge funds, and other enterprises. In business, the limited partnership offers a way for the partners to assess and allocate risks. For an investor who is more risk averse and has no interest in management, the limited partnership may be an attractive option. Many other corporate forms exist to ensure a maximum amount of protection for the investor. However, the limited partnership is generally used for riskier enterprises; most investors are satisfied with the protection the limited partnership has to offer.