Glossary term
Limited Partner (LP)
A limited partner is an investor in a partnership whose liability is usually limited to the amount they invest and who typically does not manage the business.
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What Is a Limited Partner?
A limited partner is an investor in a partnership whose liability is usually limited to the amount they invest and who typically does not manage the business. Limited partners are common in private equity funds, venture capital funds, real estate partnerships, hedge funds, and family investment partnerships.
The basic tradeoff is simple: the limited partner contributes capital and shares in the economics, but gives up day-to-day control. The general partner or manager usually makes investment and operating decisions.
Key Takeaways
- A limited partner usually provides capital but does not run the partnership.
- Limited liability generally protects the limited partner beyond the amount invested, assuming they do not act like a manager.
- Limited partners may receive income, gains, losses, and tax reporting from the partnership.
- The general partner typically controls investment selection, operations, and distributions.
- Limited partners should review fees, liquidity limits, capital calls, conflicts, and tax reporting before investing.
How Limited Partners Work
A limited partner buys or commits to an interest in a partnership. In return, the limited partner may receive a share of profits, losses, cash distributions, and tax items based on the partnership agreement.
In many private funds, limited partners commit capital upfront and the manager calls that capital over time as investments are made. The limited partner may not be able to redeem quickly, and the investment may be illiquid for years.
Limited Partner Versus General Partner
Role | Typical job | Typical risk |
|---|---|---|
Limited partner | Provides capital and receives economic interest | Usually limited to invested or committed capital |
General partner | Controls management and investment decisions | May have broader liability and fiduciary responsibilities |
Why Limited Partner Status Matters
Limited partner status can offer access to investments that are not available through ordinary public markets. But the structure also shifts power toward the manager. Investors may have limited transparency, limited voting rights, complex fees, and long lockups.
Before becoming a limited partner, investors should understand the partnership agreement, the manager's incentives, capital-call obligations, tax reporting, and exit options.
The Bottom Line
A limited partner is usually a passive investor in a partnership. The structure can provide limited liability and access to private investments, but it also requires careful review of control, liquidity, fees, and tax consequences.