A limited partnership is essentially a partnership with two classes of partners: general partners and limited partners. General partners manage the company, yet have no limited liability protection for their actions. Limited partners are passive investors (a.k.a. ‘silent partners’). They cannot manage the company, however they enjoy limited liability.
Limited partnerships also enjoy the following benefits:
- They can be used in estate planning to reduce estate taxes.
- They benefit from charging order protection
- Limited partnerships may avoid franchise taxes where a corporation or (to a lesser extent) an LLC would not.
- There is no restriction as to how many general partners or limited partners are in a limited partnership, although any company with more than 35 owners may be subject to federal securities laws.
- Limited partnerships are subject to pass-through taxation in accordance with subchapter K of Subtitle A of the Internal Revenue Code.
Because a general partner has no limited liability protection in and of itself, an LLC often acts as the general partner in a limited partnership. Furthermore, general partners (in light of their lack of limited liability protection) often hold only a 1% interest in limited partnerships, although they control the partnership 100%.
For a comparison of the pros and cons of limited partnerships vs. LLCs.
Relevant Case Law:
In re: Ehmann (this case concerns an LLC, however it applies equally to limited partnerships.)