Limited Partnership

Lesson

A limited partnership is a business entity where one or more general partners manage the business, while limited partners contribute capital but do not participate in management. Limited partners have limited liability, meaning they are only liable for the amount they invested in the partnership. This type of business structure is commonly used for investment purposes, such as real estate or private equity funds.

Practice Question #1

Which of the following best describes a limited partnership?

A) A business entity with one general partner and multiple limited partners

B) A business entity where all partners have unlimited liability

C) A separate legal entity owned by shareholders

D) A business entity that combines the features of a corporation and a partnership

Select an option above to see an explanation here.

A) A limited partnership is a business entity with one or more general partners who manage the business and one or more limited partners who contribute capital but do not participate in management. B) This describes a general partnership, not a limited partnership. C) This describes a corporation, not a limited partnership. D) This describes a limited liability company (LLC), not a limited partnership.

Terms

Limited partnership:: A business entity with one or more general and limited partners.
General partner:: A partner who manages the business and has unlimited liability for the partnership's debts.
Limited partner:: A partner who contributes capital but does not participate in management and has limited liability.
Limited liability:: The legal protection that limits an investor's losses to the amount they invested in the business.

Practice Question #2

Which type of limited partnership provides limited liability protection to both general and limited partners?

A) General partnership

B) Limited Liability Limited Partnership (LLLP)

C) Limited liability company (LLC)

D) Family Limited Partnership (FLP)

Select an option above to see an explanation here.

A) A general partnership does not provide limited liability protection to any partners. B) A Limited Liability Limited Partnership (LLLP) provides limited liability protection to both general and limited partners. C) A limited liability company (LLC) is not a type of limited partnership. D) A Family Limited Partnership (FLP) provides limited liability protection to limited partners but not general partners.

Do Not Confuse With

General partnership:: A business entity where all partners have unlimited liability and participate in management.
Limited liability company (LLC):: A business entity that combines the limited liability of a corporation with the tax advantages and flexibility of a partnership.
Corporation:: A separate legal entity owned by shareholders with limited liability and a different tax structure.

Practice Question #3

What is the primary purpose of a limited partnership?

A) To limit the liability of all partners

B) To provide a flexible business structure for all partners

C) To limit the liability of limited partners while allowing general partners to manage the business

D) To create a business entity with no liability for any partners

Select an option above to see an explanation here.

A) Incorrect, as not all partners have limited liability in a limited partnership. B) Incorrect, as the primary purpose is not flexibility but rather limiting liability for certain partners. C) Correct, as limited partnerships are designed to limit the liability of limited partners while allowing general partners to manage the business. D) Incorrect, as general partners still have unlimited liability in a limited partnership.

Historical Example

In the 1980s, limited partnerships became popular as a way to invest in commercial real estate. Many investors were attracted to these investments' tax benefits and potential profits. However, when the real estate market crashed in the late 1980s, many limited partnerships failed, and investors lost significant amounts of money.

Practice Question #4

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Example Series 65 Example Practice Question

Real-World Example

A group of investors pool their money to purchase an apartment building. They form a limited partnership, with one investor as the general partner responsible for managing the property. The other investors are limited partners, contributing capital but not participating in management. The limited partners enjoy limited liability, meaning they can only lose the amount they invested in the partnership.