Investors

What is a limited partner?

April 3, 2023
The Carta Team

A limited partner is an investor who contributes capital to a business partnership in exchange for a proportionate share of the venture’s profits. A limited partner (LP) is not involved in the day-to-day business operations and has limited liability for any debts the business might incur.

 

This video gives an overview of how limited partnerships work in venture capital as part of Carta’s free VC 101 curriculum.

 

Limited partner vs. general partner

A limited partner provides the financial backing for a business venture and does not take an active role in daily management. LPs are also known as “silent partners” or “passive investors” because of this hands-off role. 

General partners (GPs), on the other hand, are directly involved in managing and operating the business. GPs have unlimited personal liability for any debts and losses incurred by the business. In return for managing day-to-day operations and shouldering more risk than limited partners, GPs usually receive a share of the profits produced from the pooled investments of limited partners, in addition to other benefits, like management fees.

Limited partner

General partner

Day-to-day involvement

Limited

Unlimited

Investment risk level

Lower

Higher

Profit share

Smaller

Larger

What is the role of a limited partner?

A limited partnership structure is a business arrangement that involves at least one limited partner and at least one general partner. The LP provides the capital, while the GP operates the business.

This hands-off approach allows LPs to spread out their risk by investing in multiple ventures, which reduces their overall exposure to loss if any one particular investment fails. 

While LPs are not actively involved in daily operations, they still have certain rights and responsibilities for business decisions. LPs:

  • Must approve any major changes to the business plan or structure of the company (usually by majority vote)

  • Have the right to review financial statements and request information about the progress of the business 

Limited liability partnership

A limited liability partnership (LLP) is another form of business structure in which all partners have limited liability. This differs from a limited partnership, which requires at least one general partner with unlimited liability, and a general partnership, in which all partners assume unlimited liability. LLPs are most common among professional services businesses, such as law firms, accounting firms, or medical practices. Different states have different laws about what sort of business can operate as an LLP. 

Limited partners in venture capital

In venture capital, LPs are the original source for most of the capital that flows into startups. 

LPs invest their money in funds managed by venture capital firms. These funds are typically formed as limited partnerships, with the VC firm serving as the general partner. VC firms then use those funds to invest in private companies, and the LPs receive a share of any eventual profits. 

→VCs, prepare for your next meeting with LP investors using our free pitch deck template.

Types of limited partners in VC

The most common types of limited partners in the venture capital ecosystem are individuals, institutions, and family offices. 

  • Individual LPs are typically high-net-worth individuals who invest their own personal capital into venture capital funds. Individuals might also choose to be angel investors and invest directly into startups, instead of or in addition to funds.  

  • Institutional LPs are organizations with large amounts of capital to invest and a mandate to generate consistent returns on a long or even perpetual timeline. Common LPs in venture capital include pension funds, endowments, foundations, and sovereign wealth funds.

  • Family officesare private firms that manage the finances of wealthy families. Like individuals, family offices also sometimes make direct investments in startups.

What is a limited partnership agreement?

A limited partnership agreement (LPA) is a contract between any limited partners and general partners involved in a venture that outlines each party’s rights, responsibilities, and obligations. The agreement should specify the percentage of ownership each partner has in the business, how profits will be distributed, and what happens if one partner wants to sell their stake in the business, among other variables.

An LPA can help prevent disagreements between partners and protect each partner’s interests and personal liability in the business.

Before you create an LPA, you may need to file a Certificate of Limited Partnership with your local Secretary of State’s office to officially form the LP entity.

How are limited partners taxed?

Limited partnerships are taxed as pass-through entities. This means that limited partners receive individual tax treatment on their share of the partnership’s profits or losses, rather than the partnership itself being taxed. 

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