For the GP, a limited partnership is much easier to set up and operate than a corporation. Capital can be raised from LPs who essentially have no say in running the company. The profits pass through to the partners and are taxed on individual returns. In 2018, pass-through entities will receive a 20% tax deduction due to the recent tax reform. For LPs, a major advantage is that they get ownership in what they believe is a promising venture—but don’t have to take responsibility for operating the company!
Experts consider the risk exposure to lawsuits and debts of the partnership to be the major disadvantage of limited partnerships. GPs are fully exposed to all liabilities of the partnership; LPs’ liability is limited to the size of their investment—but it still can be a factor. Also, forming a limited partnership can be expensive as the partnership agreements can be complex.
Limited partnerships are often used as an investment vehicle, for example, with private equity or real estate funds. They can also be used to fund projects of limited duration, such as a specific film production or a mineral or gas exploration project. Some professionals, such as lawyers, choose this structure by default, as they are prohibited from becoming LLCs or corporations.