What is an LP?
An LP is a limited partnership with at least one GP and one LP, pass-through taxation, unlimited GP liability, limited LP liability, and state filings.
Rho Editorial Team
An LP, or limited partnership, includes at least one general partner (with management responsibility and unlimited liability) and one or more LPs (with limited liability).
Limited partners are passive investors, often in private equity, real estate, or venture capital funds.
LPs benefit from pass-through taxation but require formal agreements and filings.
LPs differ from LLCs, LLPs, and corporations in liability, tax treatment, and management.
For founders, understanding LPs is essential when structuring funds or evaluating investors.
If you’re raising from venture funds, you’ll run into LPs constantly. An LP, or limited partnership, is the legal structure behind most investment funds. It brings together at least one general partner, who manages the fund and takes on unlimited liability, and limited partners, who supply capital and stay passive investors.
For founders, the key takeaway is that LPs provide the money while the general partner makes the decisions. Understanding this setup helps you see how funds are organized and what drives an investor’s ability to support your company.
How a limited partnership works
An LP combines management and capital in a single structure with clear roles. The general partner (GP) runs the venture, signs contracts, and directs day-to-day operations—while carrying unlimited liability. Limited partners (LPs) provide capital, share in the profits, and stay out of management.
A typical flow looks like this:
LPs commit capital under the partnership agreement.
The GP calls capital in tranches when needed.
The GP invests or operates, keeping records and reports.
Returns flow back to investors through distributions under the agreed “waterfall.”
Risk mirrors each role. The GP takes full personal exposure for obligations (though in practice most funds set up the GP as an LLC to shield individual managers). LPs keep liability capped at what they invest—so long as they remain passive and don’t sign guarantees.
Forming an LP is relatively straightforward: file a certificate of limited partnership with the secretary of state, designate a registered agent, and execute an LP agreement that defines ownership, decision-making, profit splits, investor admission, and dispute processes.
In practice, many funds set up the GP itself as an LLC. That shields individual managers, but the GP entity still bears unlimited liability.
Typical uses of LPs
LPs are used when investors want to fund a manager who runs a focused plan. Investors contribute capital and remain hands-off; the GP runs execution. You will see this in private equity funds, venture capital funds, and real estate projects. Control sits with the GP, investor risk is capped at what they invest.
1. Private equity and venture capital funds
Most PE funds and venture capital funds are organized as limited partnerships. Institutional limited partners, such as pension funds, endowments, and family offices, commit capital to a fund while the GP deploys it into portfolio companies under the fund mandate.
2. Real estate projects
Real estate sponsors often form a limited partnership for each acquisition or development. Limited partners contribute equity to purchase or build properties. The GP sources deals, arranges financing, manages assets, and oversees dispositions.
3. Other specialized investments
LPs also support resource pooling and niche strategies where committed capital and expert management matter. Common examples include energy or mineral development programs, infrastructure vehicles, film and media financing, and search funds.
Why limited partners matter for startup funding
Most venture funds and many growth investors are LP based vehicles, so their structure quietly shapes how they invest. That setup influences check size, pace, board capacity, and the support you receive after closing.
LPs, typically institutions such as pension funds, endowments, foundations, insurers, and family offices, commit capital to a fund while the GP calls capital over time, invests, manages reserves for follow-ons, and returns cash through distributions. The agreement sets fees, allocation rules, and guardrails like concentration or sector limits.
To judge capacity and pacing, ask where the investor is in the fund life, how much committed capital remains, and what a typical check looks like at your stage. The answers show whether they can lead now and whether they can stay active across future rounds.
To gauge staying power throughout your company’s life, review reserves and concentration policies. Ask how much is reserved for follow-ons, how the firm balances new investments against reserves, and whether sector or position limits could restrict future support. Clear responses help you forecast dilution and runway.
To set working expectations, clarify who makes the final decision, how long approvals take, and how many boards the team already sits on. Confirm the reporting cadence you should expect, any co-investment rights you may receive, and how proceeds are handled.
Taken together, these answers reveal whether an investor has the capital, time, and flexibility to back your plan from first check through outcomes.
Limited partnership vs. other business structures
Your choice of entity sets who controls the business, who takes on risk, and how taxes are handled. Here’s how an LP stacks up against other structures.
LP vs general partnership (GP)
A GP puts all owners in charge and exposes each owner to full personal risk. An LP concentrates control in the GP and caps investor exposure at the amount they invest. Use a GP when co owners want equal control and accept shared risk.
LP vs limited liability partnership (LLP)
In an LLP, partners share management and are usually protected from liability for each other’s malpractice. Protection for contractual or business debts varies by state.
Use an LLP when professional partners want shared management with protection.
LP vs limited liability company (LLC)
An LLC offers flexible governance and caps exposure for all members. Tax treatment can change with elections. An LP is pass through by default and keeps control with the GP while other owners remain non managing. Use an LLC when you need flexible governance and tax elections.
LP vs corporations
A corporation separates owners and managers through shareholders and a board. It typically faces tax at the entity level and again when profits are distributed. An LP is often simpler for pooling investor capital because profits pass through and the GP retains operational control. Use a C-corp when planning institutional equity or a future public listing (standard for venture-backed startups).
Quick comparison table
Feature | Limited partnership (LP) | General partnership (GP) | Limited liability partnership (LLP) | Limited liability company (LLC) | Corporation |
Owners | General partner plus LPs | Partners | Partners | Members | Shareholders |
Management control | General partner controls day-to-day | All partners manage | All partners can manage | Flexible, member or manager managed | Board and officers |
Liability | GP has unlimited personal liability, LPs have a liability that is capped | All partners have unlimited personal liability | All partners have a liability that is capped | All members have a liability that is capped | Shareholders have a liability that is capped |
Tax treatment | Pass-through taxation by default | Pass-through taxation | Pass-through taxation | Default pass-through (partnership for multi-member, disregarded for single-member); can elect corporate (C or, if eligible, S) tax treatment | C-corp double taxation by default; S-corp election available with shareholder and class restrictions |
Investor role | LPs are passive investors with a share of the profits | Partners are active owners | Partners can be active owners | Members may be active or passive | Shareholders are typically passive |
Typical users | PE funds, venture capital funds, real estate projects | Small co-founder groups without formal filings | Professional firms | Startups and small businesses seeking flexibility | Scalable companies planning outside investment or public markets |
Formation docs | Certificate of LP plus agreement | Often created by conduct or simple agreement | State registration plus agreement | Articles of organization plus operating agreement | Articles of incorporation, bylaws, board actions |
Tax treatment of LPs
Most limited partnerships are treated as pass-through entities for federal income tax. That means the partnership itself generally does not pay income tax. Instead, profits and losses are allocated under the partnership agreement and reported directly by the partners.
But there are some exceptions: publicly traded partnerships are taxed as corporations. In addition, many states impose franchise taxes, gross receipts taxes, or minimum fees on LPs even when federal treatment is pass-through.
How it works in practice
Each year, the partnership files IRS Form 1065 and issues a Schedule K-1 to every partner (individual or entity). Partners use the K-1 to report their share of income, deductions, and credits on their own returns. Because many allocations are classified as “passive activity,” timing and deductibility limits can apply even when cash distributions are delayed.
Compensation for the general partner is usually set out in the agreement. A management fee is taxed as ordinary income when received. A carried interest gives the GP a share of partnership profits, and those allocations keep the same character they had in the partnership (for example, capital gains remain capital gains).
Tax example
If an LP earns $500,000 of ordinary income and the split is 20% to the GP and 80% to LPs, the GP reports $100,000 and the LP group reports $400,000. Reporting follows the allocation even if cash is distributed later.
Tax rules do not change role-based liability. The GP still bears unlimited exposure for the partnership’s obligations, while LPs remain protected up to their investment so long as they stay passive and avoid guarantees.
For more details, see IRS Publication 541 Partnerships, including instructions related to Form 1065 and Schedule K-1. This section is informational only and not legal or tax advice.
Pros and cons of LPs
Limited partnerships work best when you want clear management control in one place and investor capital from many sources. Here is the tradeoff to weigh before you form one.
Pros
LPs favor non-managing investors while keeping a manager in charge.
Benefit | Founder takeaway |
Capped liability protection for LPs | Easier to attract capital from investors who want exposure without risking personal assets. |
Access to capital from multiple LPs | Pool commitments from pension funds, family offices, or individuals under one business structure. |
Pass-through taxation | Avoid corporate double tax. Income and losses flow to partners based on the partnership agreement. |
Attractive for silent partners and passive investors | Suits backers who prefer reporting and a share of the profits, not day-to-day involvement. |
Cons
The cost of that flexibility is concentrated risk and extra guardrails.
Drawback | Founder takeaway |
General partner bears unlimited personal liability | The GP bears unlimited liability (often mitigated by using an LLC as GP). |
LPs risk losing limited liability if they “participate in control” beyond statutory safe harbors (which vary by state). | Keep LPs out of decision making to preserve their liability protection. |
Harder to transfer ownership or dissolve without approvals | Transfers often require consent under the partnership agreement. |
Filing fees, annual report requirements, and ongoing compliance | Budget for state filings, a registered agent, and recurring administrative work each year. |
How to form an LP
Forming a limited partnership is a state filing plus a few federal setup tasks. The sequence below keeps the GP in control and gives LPs the liability protection they expect.
Choose a state of registration. Compare tax treatment, filing fees, annual report requirements, and where the LP will do business.
Draft an LP agreement. Define contributions, distributions, management authority, transfer rights, reporting, and dispute processes.
File the certificate of limited partnership with the secretary of state (name varies by state). Provide required details and consider expedited processing if timing matters.
Designate a registered agent. Keep the agent and service address current to receive legal notices.
Obtain an EIN from the Internal Revenue Service. Use it for banking, vendor setup, and tax filings.
Set up ongoing compliance. Calendar state filings, pay fees on time, file the annual report, and update records when terms change.
Confirm any required foreign qualifications if doing business in other states.
Exploring funding beyond LP-backed investors with Rho
Limited partnerships are a core business entity for structuring investments. GPs manage, limited partners provide capital, and the agreement sets the rules. Founders benefit from knowing how LPs function when they evaluate investors and when they compare financing options for the company.
How we help founders expand the options
We guide you through non dilutive capital so you can pair or replace equity when it makes sense. That can include venture debt, credit lines, and revenue based financing. We focus on clear terms, fast guided matching, and choices that fit your stage and capital stack.
What to expect
A quick assessment of your needs, runway.
A short list of realistic options with pros, cons, and likely timelines.
Support on the data package lenders or investors will ask for, and how to prepare.
Financing is subject to approval and terms. This material is for informational purposes only and is not legal, tax, or financial advice.
FAQs
What does LP mean in business?
An LP is a type of business and business structure, a business entity formed by filing a certificate of LP with the secretary of state and naming a registered agent. Terms live in an LP agreement.
Who are typical LPs in private equity?
Institutional investors, for example pension funds, endowments, foundations, insurance companies, funds of funds, and family offices. In private equity funds they act as silent partners, providing commitments to the manager.
Can limited partners lose more than they invest?
Generally no—limited partners’ exposure is typically limited to their commitments. Exceptions can arise from guarantees, capital call obligations, or return-of-distribution claims. Consult counsel.
What is the difference between an LP and an LLC?
An LP is one of the types of partnerships, with management concentrated in a managing party and other owners passive. An LLC, a limited liability company, is a different business structure that gives all members capped exposure and flexible governance.
How are LPs taxed?
Most LPs are pass-through entities for federal tax; publicly traded partnerships are an exception.
The partnership files an information return, issues Schedule K-1s, and owners report items on their income tax returns under Internal Revenue Service rules. This is for informational purposes only.