What is a Limited Partnership?

A limited partnership is an unincorporated business organized by one or more individuals, called general partners, who manage the business and are equally liable for the debts of the business. Other individuals, called limited partners, invest in the business but are not directly involved in management. Limited partners are liable only to the extent of their investments or capital contributions.

Unlike a limited liability company or a corporation, partners share equal responsibility for the company's profits and losses, and its debts and liabilities.

The general partner manages the project and collects fees and a portion of the capital gain. The limited partners supply the capital, have no daily management involvement and have limited liability. They receive income, capital gains and tax benefits from the partnership. Although partnerships can be formed to invest in just about any type of investment, they are usually formed to invest in real estate, oil and gas exploration and development and equipment leasing. Some limited partnerships are also designed to provide start-up capital for companies with promising new products.

The partnership itself does not pay income taxes, but each partner may be subject to unrelated business income (UBIT) and other taxes, and it is important to consult tax professionals for proper direction.

A limited partnership may be a publicly-offered investment or a private offering. Public limited partnerships usually have a $1,000 to $5,000 minimum purchase amount, with a $2,000 minimum for IRA investors. Private limited partnerships, often referred to as direct participation programs (or DPPs). They generally require at least $20,000 and typically involve suitability rules which require that individuals meet minimum net worth, income, and tax bracket criteria. Most limited partnerships intend to dispose of their holdings within a specified period of time (typically 7 to 10 years) and distribute the proceeds to investors as capital gains. However, some limited partnerships stay in business much longer.

Limited partnerships are illiquid because there is no official secondary market (like a stock exchange) to regularly trade the units. Although some sponsors agree to make markets under certain circumstances, there are a number of firms that trade partnership shares at distress prices on secondary trading desks