By Jennifer Reuting

Think of a limited partnership as a general partnership with a little bit of protection against lawsuits thrown in. Whereas a general partnership doesn’t protect any of the owners against the business’s lawsuits and creditors, a limited partnership protects the silent partners of the business (also called the limited partners).

Limited partners can receive profit from the company, but they don’t manage the business’s day-to-day operations. If the business goes south, the limited partners risk losing only the money that they’ve invested in the company, while the managers (called general partners) put all their personal assets at risk.

As far as the general partners are concerned, the business may as well be a general partnership. They are jointly and equally liable for the debts and obligations of the business, even those entered into by the other general partner(s). Also like a general partnership, a limited partnership is subject to partnership taxation.

Limited partnerships can have any number of general and limited partners, as long as there’s at least one general partner to take the blame if something goes wrong.

Why does anyone bother to use limited partnerships, especially considering that they’re somewhat complicated to set up and they lack basic liability protection for the general partners?

These reasons alone make the limited partnership a bad choice for business owners; however, because of the limits they place on the decision-making power of the limited partners, limited partnerships are great for use in estate planning (for example, the kids can receive money from, but not manage, the assets of the limited partnership).