Limited risk for investors, not active owners

A limited partnership (LP) is like a general business partnership, but it offers limited liability protection to some partners. At least one partner must be a general partner—who faces unlimited personal liability. The others can be “silent partners” who can have no say in the business, but who don’t have personal liability. Unlike general partnerships, LPs must file formation documents with the state.

When is the limited partnership business type most commonly used?

The limited partnership (LP) structure is especially appealing to types of businesses where a single, limited-term project is the focus, such as real estate or the film industry. LPs can also be used as a form of estate planning in that parents can retain control of their business while transferring interest to their children.

How are limited partnerships taxed?

Limited partnerships (LPs) allow for pass-through taxation, although a partnership return must be filed. The LP’s income (or loss) shown on this return is passed-through to the partners’ individual tax returns. The partners must then report these items on their individual tax returns and pay any necessary tax. Special rules limit the losses of the limited partners—and their income counts toward the Net Investment Income Tax.