What is an LP in business? In brief, a limited partnership (LP) is a business structure involving partners with differing responsibility and liability levels for the partnership’s activities. General partners control day-to-day operations and manage the business. Limited partners contribute capital while limiting their personal liability. LPs are common in real estate, private equity, and oil and gas industries because they allow for flexible fundraising without handing over managerial control.
At Massingill, we help Texas entrepreneurs, investors, and families navigate business formation with clarity and confidence. Whether you are forming an LP, limited liability company (LLC), or corporation, our experienced attorneys are here to help you build your business on a strong legal foundation.
What Is a Partnership?
You now know the answer to, What does LP stand for in business? But what is a partnership, and what makes it limited?
Partnerships are a business structure involving a legal relationship between two or more people who agree to carry on a business for profit as partners. They may agree to share, among other things:
- Profits and losses,
- Decision-making power, and
- Operational responsibilities.
The three types of partnerships that exist are:
- General partnership (GP). All partners share equally in the management of the business and are personally liable for the business’s debts and obligations.
- Limited partnership (LP). Two or more partners where at least one general partner has managerial control and personal liability, and one or more limited partners invest in the partnership but do not manage the business.
- Limited liability partnership (LLP). Often used by professionals like lawyers, accountants, and doctors, all partners have limited liability protection and may share management responsibilities.
When a partner is personally liable, the business’s creditors and people with legal cases against the partnership can collect monetary damages directly from the individual partner when the company cannot pay its debts. In exchange for greater risk, general partners have greater control.
How Does a Limited Partnership Work?
What is an LP company, in function? You need at least two people who want to collaborate on a business venture to establish an LP.
Formation Requirements
In Texas and many other states, forming a limited partnership requires filing a document called a certificate of formation with the Secretary of State. In the certificate, you include:
- The name of the business, which must include “Limited Partnership” or “LP”;
- Identification information for general partners;
- The name and address of your registered agent, a person or business designated to receive legal documents on behalf of the partnership; and
- The partnership’s official address.
If you plan to hire employees, you also need an Employer Identification Number (EIN) from the Internal Revenue Service (IRS).
Partnership Agreement
Partnership agreements serve as the partnership’s organizational and operational documents. They typically address:
- Profit-sharing,
- Decision-making authority,
- Partner contributions,
- Dispute resolution, and
- Exit procedures.
While the law does not require partnerships to create a partnership agreement, written, clear agreements are essential for partners to be on the same page and resolve issues that arise.
Filing and Compliance Responsibilities
General partners are responsible for the business’s legal and financial obligations, such as:
- Filing annual reports with the state with details about the business’s structure and activities;
- Paying franchise taxes, which are state fees businesses must pay to operate legally,
- Keeping accurate financial records;
- Complying with state and federal laws; and
- Managing contracts and business operations.
Limited partners are generally not responsible for filing or operational tasks unless they agree to specific responsibilities in the partnership agreement.
What Is an LP in Business? General and Limited Partner Roles
LPs must have at least one general and one limited partner, who play different roles in the funding and operation of the business. The general partner:
- Manages the business,
- Is personally liable for debts and lawsuits, and
- Can make decisions on behalf of the LP.
The limited partner:
- Contributes capital,
- Has liability only up to their investment, and
- Does not manage day-to-day operations.
In short, general partners and limited partners vary in terms of their:
- Control and management roles. General partners manage the business, making decisions about what the business does day-to-day and in the long term, while limited partners are typically passive investors.
- Liability. General partners have unlimited personal liability, while limited partners are not personally liable beyond the amount of their investment.
- Responsibility. General partners must ensure the business complies with state and federal laws, honors contracts, and offers a safe working environment.
Significantly, a limited partner may become liable for business activities if they engage in managerial activities, such as signing contracts, supervising employees, or participating in high-level decision-making.
Is an LP Right for Your Business?
Limited partnerships can be a smart option if you need investors who prefer to stay behind the scenes. They work well to enable investors, as limited partners, to:
- Fund projects without participating in management,
- Contribute capital under a single fund structure,
- Support risky ventures without assuming personal risk, and
- Support creative endeavors without interfering with creative control.
LPs are not for every business. If all partners want equal say in operations or equal liability protection, other business structures, like an LLC or LLP, might work better.
Talk to a Texas Business Lawyer About Your Options
Deciding whether a limited partnership is the best structure for your goals requires careful planning and legal insight. At Massingill, we help Texas business owners, investors, and professionals choose the entity type that fits their needs. Then, we guide you through setting the business up properly from the start, including helping you create a thorough partnership agreement.
We offer flat-fee business formation services, secure online document access, and personalized counsel to help you make smart, informed decisions. Whether you are launching a new venture or bringing in investors, we are here to help.
Ready to get started? Contact Massingill today to schedule a consultation.
Joshua Massingill
Joshua Massingill is an attorney practicing in Austin, Texas. He serves on the Texas State Bar’s Law Practice Management Committee, the Leander Educational Excellence Foundation (LEEF) Board of Directors, and the Success-Werx Board of Advisors. He mentors young entrepreneurs in Leander ISD’s INCubatorEDU program and is active in his church.
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