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What Is a Limited Partnership? - Definition, Advantages & Disadvantages

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  • 0:07 Limited Partnership
  • 2:19 Advantages
  • 4:52 Disadvantages
  • 6:25 Lesson Summary
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Lesson Transcript
Instructor: Ashley Dugger

Ashley has a JD degree and is an attorney. She has taught and written various law courses.

Many businesses are formed as partnerships. There are several different types of partnerships. This lesson explains the advantages and disadvantages of limited partnerships.

Limited Partnership

Partnership is the most common type of business structure for businesses with more than one owner. A business partnership is a for-profit business established and run by two or more individuals. There can be any number of partners involved in the business, as long as there are at least two. The partners serve as co-owners of the business.

Most business partnerships are general partnerships. A general partnership is a partnership where all partners have responsibility for the business and unlimited liability for business debts. General partners share the benefits and the obligations of the business. This means that a general partner can be held personally liable for the partnership's debts.

However, there are other types of partnerships where at least one owner isn't burdened with full personal liability for the business' debts. One of these is known as limited partnership. A limited partnership is a business partnership where at least one owner is a general partner and at least one owner is a limited partner. The general partners make everyday business decisions and are personally liable for business debts. However, the limited partners simply invest in the business and have little control over business operations.

For example, let's say that Ben, Bob and Brandi are partners in owning and running a bookstore. They own The Book Nook. Per their partnership agreement, Ben and Bob are limited partners. They are investors in the store. They each gave $50,000 to establish the store. Brandi is a book expert, so she runs the store. Brandi is a general partner. Note that all the partners will be considered general partners unless there's a written agreement between the partners stating otherwise.

Advantages of Limited Partnerships

Limited partnerships, like The Book Nook, hold several advantages, especially for limited partners, like Ben and Bob. The main advantage for limited partners is that their personal liability for business debts is limited. A limited partner can only be held personally responsible up to the amount he or she invested. Limited partners enjoy a protected investment, knowing they cannot lose more money than they've contributed.

For example, let's say a book superstore opens right next door to The Book Nook. As a result, The Book Nook loses customers to the new store. Brandi is several months behind in paying the store's rent and hasn't paid the bills for the last two shipments of books. In total, The Book Nook owes its creditors $200,000, and the creditors have filed lawsuits in an effort to collect.

The creditors can seek payment from any or all partners, though the creditors cannot collect more than they are owed. Remember that Ben and Bob are limited partners. As such, neither can be held personally responsible for an amount more than he invested. This means that Ben can be held personally liable for no more than $50,000, and Bob can be held personally liable for no more than $50,000.

On the other hand, Brandi is a general partner. Her personal liability for business debts is unlimited. Brandi can be held personally liable for the entire $200,000, or if the creditors already collected from Ben and Bob, she'll be held personally liable for the remaining $100,000.

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