What is Limited Partnership (LP)?

How it works

The Limited Partnership (LP) is the oldest commercial form combining limited liability with partnership tax transparency, dating to medieval Italian commenda arrangements and French société en commandite. The modern US version is governed by state-law variants of the Uniform Limited Partnership Act (most states have adopted some version, with Delaware and Cayman being the most-used jurisdictions).

Structure:

• At least one general partner (GP) — manages the partnership, has unlimited personal liability for partnership debts.
• One or more limited partners (LPs) — passive investors, liability capped at their committed capital.
• No board, no shareholders — partnership agreement is the constitutional document.

To preserve LP liability protection, limited partners must remain passive — not participating in management decisions. Active management can convert their status to general partner with unlimited liability.

Tax transparency

LPs are tax-transparent in nearly every jurisdiction:

• US: federal partnership treatment by default (Form 1065 + K-1 to each partner). Can elect corporate tax via Form 8832 (rare).
• UK: tax-transparent under English partnership law.
• Cayman: Cayman ELP (Exempted Limited Partnership) tax-transparent + zero local tax.
• Most other jurisdictions: similarly transparent.

Profits are allocated per the partnership agreement; each partner reports their share at their personal / corporate rate in their own jurisdiction.

The fund standard

The dominant global fund structure is LP form:

• GP entity (often a Delaware LLC or Cayman exempted company) — controlled by the fund manager.
• LP entity (Delaware LP or Cayman ELP) — investors subscribe as limited partners with capped liability.
• Capital commitments drawn down over the fund's life.
• Carried interest = the GP's share of profits above a hurdle.

This structure has dominated venture capital, private equity, real estate funds, hedge funds (where applicable), and infrastructure funds for 40+ years. The mechanics — capital calls, distributions, carry waterfalls, GP catch-up, hurdle rates — are all built around the LP form.

LP vs LLP vs LLC

US tax for non-resident LPs in US-engaged partnership

If a US-formed LP is engaged in a US trade or business, foreign LPs receive ECI (Effectively Connected Income) treatment on their share. The partnership withholds §1446 tax quarterly at 37% individual / 21% corporate top rate. Foreign LP files Form 1040-NR claiming the credit.

If the LP is purely passive (investment-only, no US trade or business), foreign-source income flows through without US tax to non-resident LPs.

Examples

• VC fund with $200M commitments. Delaware LP with Cayman ELP feeder for offshore investors. Delaware LLC as GP entity, owned by the fund managers. Investors subscribe as LPs; capital drawn down over 4-year investment period. Profits distributed to LPs after hurdle + carry waterfall to GP.
• Real-estate co-investment with 8 family-office investors. Delaware LP holding the property; one family office acts as GP via a single-purpose LLC. Each investor's tax follows their share in the LP's net rental income / capital gains.

Common mistakes

• Putting a natural person as direct GP. Unlimited personal liability. Use a corporate (LLC) GP instead.
• Limited partners actively participating in management. Risks recharacterisation as GP with unlimited liability under partnership law.
• Forgetting §1446 withholding for foreign LPs. Partnership liable for the WHT even if foreign LP doesn't pay the underlying tax.
• Confusing LP with LLP. LP has GP / LP roles with different liability; LLP has all members limited. Different structures, different uses.