Limited partnership

A limited partnership (LP) splits ownership into two roles. The general partner runs the business, makes decisions, and bears unlimited personal liability for partnership debts. Limited partners supply capital, stay out of day-to-day management, and can lose no more than their investment plus any amounts they have agreed to contribute.

That liability shield depends on staying passive. If a limited partner takes an active management role, courts can treat them as a general partner and strip the protection. The partnership agreement spells out how much capital each partner contributes, how profits and losses are split, what the general partner may do without consent, and how the partnership is dissolved. A certificate of limited partnership is filed with the state to create the entity.

Limited partnerships are pass-through entities for tax purposes: the partnership itself pays no income tax, and each partner reports a share of income, deductions, and credits on a personal return via Schedule K-1. That flow-through of both income and losses is why LPs are used for real estate, oil and gas, and equipment leasing programs — though passive loss rules restrict how those losses can be used. When a partnership dissolves, secured lenders and general creditors are paid before limited partners, and general partners are paid last.

Securities exams approach LPs from two directions. The Series 7 covers them as direct participation programs — how they are organized, sold, and taxed — while the Series 65 and Series 66 test them as an alternative investment and as a business-entity account type, including who has authority to trade for the partnership and how suitability is assessed for a client investing in one.