Definition: A business organization that allows limited partners to enjoy
limited personal liability while general partners have unlimited
personal liability
A limited partnership is similar to a general partnership except
that it has two classes of partners. The general partner(s) have
full management and control of the partnership business but also
accept full personal responsibility for partnership liabilities.
Limited partners have no personal liability beyond their investment
in the partnership interest. Limited partners cannot participate in
the general management and daily operations of the partnership
business without being considered general partners in the eyes of
the law.
The general partner can be either an individual or a
corporation. One of the more common limited partnership situations
involves a silent partner, where one or more limited partners
provide financing for the venture and the general partners run the
business. A limited partnership in this case protects the assets of
silent partners by limiting their exposure and liability and acts
as a conduit to pass current operating profits or losses on to
them.
Most jurisdictions require limited partnership agreements to be
in writing and, for the most part, contain the same provisions as
those in a general partnership agreement-with some complex
additions. Legal costs of forming a limited partnership can be even
higher than for a corporation because in some states they are
governed by securities laws.
Another aspect of limited partnerships is that in some
businesses, the limited partner (also called the passive investor)
may be subject to special tax liabilities that can offset the tax
shelter advantages. The IRS tends to look at these facts on a
case-by-case basis.
Limited partnerships file an IRS Form 1065 once a year.
Individual limited and general partners include their allocable
share of partnership income or loss on their individual income tax
returns and pay taxes on that share based on their tax bracket.
Partners cannot deduct losses greater than their basis in the
partnership, which includes their investment plus any funds loaned
to the partnership (except for real estate limited partnerships
that are governed by special rules).
The 1986 Tax Reform Act limited the amount of losses a limited
partner can deduct on a personal tax return. If the partnership is
expected to generate tax losses in its early years, your CPA can
help determine whether those losses will benefit you.