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What Is a Limited Partner?
Let me explain what a limited partner is. You're an investor in a limited partnership, putting in money for shares, but you have restricted voting power on business matters and no involvement in daily operations.
Your liability for the company's debts won't go beyond what you've invested. That's why we often call limited partners silent partners.
Key Takeaways
As a limited partner, or silent partner, you're an investor, not a manager handling the business daily. Your liability stays within your investment amount. Remember, a limited partnership always includes at least one general partner and one limited partner.
Understanding Limited Partners
A limited partnership, by definition, has at least one general partner managing the day-to-day and at least one limited partner like you. The general partners run the show.
State laws vary, but generally, you as a limited partner don't get the same voting power as a general partner. The IRS treats your income from this as passive. If you put in more than 500 hours a year, you might be seen as a general partner.
In some states, you can vote on big issues, like removing general partners, ending the partnership, changing the agreement, or selling major assets.
Important Note
You could become personally liable as a limited partner only if it's proven you've taken an active role in the business.
General Partner vs. Limited Partner
A general partner gets paid for running daily operations and making decisions, but they can be personally liable for business debts.
As a limited partner, you've bought shares as an investment without getting involved in daily business. You can't create obligations for the partnership or manage it.
Since you don't manage, you're not personally liable for debts. Creditors might go after the general partner's assets, but not yours beyond your investment.
You'd only face personal liability if proven to have acted like a general partner. Your losses can't exceed your investment.
Fast Fact
Investors in private equity funds are known as limited partners.
Tax Treatment for Limited Partners
Limited partnerships are pass-through entities, so you and other partners pay taxes on your share of income, not the partnership itself.
You don't pay self-employment taxes as a limited partner because your income is passive, not earned. The 1986 Tax Reform Act lets you offset losses from passive income.
What Is the Role of a Limited Partner?
Your role as a limited partner is to invest without making decisions for the company or its assets. That's why you're often called a silent partner.
What Are the Advantages of Being a Limited Partner?
You can invest with liability limited to your contribution. This setup is perfect if you want ownership without unlimited risk exposure.
How Are Limited Partners Taxed?
Since you're not active in the business, the IRS sees your income as passive, not subject to self-employment taxes.
The Bottom Line
As a limited partner, or silent partner, you're an investor in a limited partnership. You don't make business decisions, unlike general partners. Your income is passive per the IRS, so no self-employment taxes apply.
