Limited partner

A limited partner is a member of a partnership who invests capital into the business but has limited involvement in its management and limited liability for its debts.
Updated: Jun 27, 2024

3 key takeaways

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  • Limited Liability: Limited partners are only liable for the debts of the partnership up to the amount of their investment.
  • Passive Role: They do not participate in the day-to-day management or operations of the business.
  • Profit Sharing: Limited partners share in the profits of the business based on their investment, typically as outlined in the partnership agreement.

What is a limited partner?

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A limited partner is an investor in a partnership who contributes capital to the business but does not take part in its management or operations. Limited partners enjoy the benefit of limited liability, meaning their personal assets are protected, and they are only liable for the partnership’s debts up to the amount of their investment. This structure is common in limited partnerships (LPs), where there are both general partners, who manage the business and have unlimited liability, and limited partners, who provide capital and have limited liability.

Importance of a limited partner

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  • Capital Contribution: Provides essential capital for the partnership without seeking a management role.
  • Risk Management: Limits personal financial risk to the amount of their investment.
  • Business Growth: Facilitates the expansion and growth of the partnership by injecting funds.

How a limited partner works

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Investment and Liability

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Limited partners invest capital in the partnership, which is used to finance the business’s operations, expansion, or other needs. Their liability is confined to their investment amount, meaning they are not personally responsible for the partnership’s debts beyond what they have contributed.

Management Restrictions

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Limited partners are typically not involved in the management or daily operations of the business. This passive role distinguishes them from general partners, who actively manage the partnership and bear unlimited liability. Limited partners’ lack of involvement in management helps protect their limited liability status.

Profit Sharing

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Limited partners share in the profits of the partnership, usually in proportion to their investment. The specifics of profit distribution are outlined in the partnership agreement. This arrangement allows limited partners to benefit financially from the partnership’s success without being involved in its operations.

Examples of a limited partner

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  • Venture Capital Fund: Investors in a venture capital fund act as limited partners by providing capital but not participating in the management of the portfolio companies.
  • Real Estate Investment: Individuals invest in a real estate limited partnership, contributing funds for property acquisition and development while the general partner manages the properties.
  • Private Equity Firm: Limited partners in a private equity firm provide the capital needed to acquire and restructure companies, while the general partners handle the investment strategies and operations.

Real world application

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Limited partners are crucial in various industries, providing the necessary capital for businesses to grow without seeking an active management role. For example, in venture capital and private equity, limited partners such as institutional investors, pension funds, and wealthy individuals provide significant funding. Their investments enable general partners to pursue business opportunities, acquisitions, and growth strategies.

In real estate, limited partnerships allow individuals to invest in large-scale property developments without managing the properties. This setup benefits both parties: general partners can focus on their expertise in managing and developing real estate, while limited partners gain exposure to real estate investments with controlled risk.

Overall, the role of limited partners is essential for partnerships that require substantial capital but prefer to limit the number of active managers. This arrangement supports business expansion, innovation, and growth across various sectors while offering limited partners a way to invest with mitigated risk.

Sources & references
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