A US limited partnership is a state-registered business with two classes of owners: general partners who run the company and are personally liable for its debts, and limited partners who put in capital but can only lose what they invested. The structure is common in real estate, private equity, and family investment vehicles, and it comes with specific rules for formation, federal taxation, and annual upkeep that differ depending on which kind of partner you are.
How General and Limited Partners Differ
General partners manage the business and can bind the partnership to contracts and other obligations. In exchange for that authority, they carry unlimited personal liability. If the partnership can’t cover its debts or loses a lawsuit, creditors can reach general partners’ personal bank accounts, real estate, and other assets. When more than one general partner exists, each one can be held responsible for the full amount owed, not just a proportional share.
Limited partners contribute money or property but don’t run the business. Their exposure stops at what they put in. A limited partner who invested $100,000 can lose that $100,000 and nothing more. Personal savings and other property stay out of reach.
Older partnership statutes stripped a limited partner’s liability shield if they got too involved in management. The Uniform Limited Partnership Act of 2001 eliminated that “control rule,” so in most states a limited partner can consult with general partners, vote on major decisions like mergers or dissolution, and act as a guarantor without losing protection. A handful of states still follow the older framework, so the partnership agreement should spell out what limited partners can and cannot do.
The LLLP Variant
About 30 states recognize a limited liability limited partnership (LLLP). In a standard LP, general partners have unlimited personal liability; in an LLLP, general partners also get liability protection similar to what limited partners enjoy. Where it’s available, electing LLLP status at formation shields general partners from personal exposure to partnership debts and to the misconduct of co-partners. The certificate of limited partnership typically includes a checkbox or statement indicating whether the entity is an LLLP.
Forming a Limited Partnership
Every LP begins with a certificate of limited partnership filed with the secretary of state or equivalent office. Under the widely adopted uniform act, the certificate lists five items: the partnership’s name, the street and mailing addresses of its principal office, the name and address of a registered agent in the state, the name and address of every general partner, and whether the LP is electing LLLP status. Every general partner must sign.
The name must include “Limited Partnership” or “L.P.” and be distinguishable from other entities already registered in the state. The registered agent needs a physical street address in the filing state to accept legal documents on the partnership’s behalf. A post office box won’t work.
Separately from the certificate, partners should draft a written partnership agreement. This internal document isn’t filed with the state, but it governs how the business actually operates: profit and loss allocation, voting rights, capital contribution requirements, how partners are admitted or removed, and what happens when someone wants out. Without one, state default rules fill the gaps, and those defaults rarely match what the partners intended.
Getting an EIN
Once the state approves the certificate, the partnership needs a federal Employer Identification Number (EIN) from the IRS. You can apply online at no cost through the IRS website, and the number is issued immediately. The application requires the Social Security number or ITIN of a responsible party, which for an LP is typically a general partner. Only one EIN is issued per responsible party per day, and the online session can’t be saved, so have everything ready before starting.1Internal Revenue Service. Get an Employer Identification Number You’ll need the EIN to open business bank accounts, hire employees, and file federal tax returns.
Operating Across State Lines
An LP formed in one state that conducts business in another generally must register as a “foreign limited partnership” in that second state. That means filing an application for authority and paying a separate registration fee in each state where it operates. What counts as “doing business” varies by jurisdiction, but having a physical office, employees, or ongoing transactions usually triggers the requirement. Failing to register can lead to fines and the loss of access to that state’s courts for enforcing contracts.
Filing Costs and Timing
Most states accept the certificate of limited partnership online, though paper filing remains an option. Fees vary widely: some states charge under $100, others several hundred dollars. Many offices offer expedited processing for an additional fee.
Processing runs anywhere from a few business days to several weeks depending on the state and time of year. Once approved, the state issues a stamped copy or formal acknowledgment. Keep it with your records. You’ll need it to open bank accounts, apply for permits, and prove the entity exists to third parties.
Federal Tax Treatment
An LP is a pass-through entity for federal income tax purposes. The partnership itself doesn’t pay income tax. Each partner reports their share of income, losses, deductions, and credits on their own return and pays tax at their personal rates.2GovInfo. 26 USC 701 – Partners, Not Partnership, Subject to Tax This avoids the double taxation that hits C corporations.
The partnership files an annual information return on IRS Form 1065 by March 15 for calendar-year partnerships, or the 15th day of the third month after a fiscal year ends. The return reports the partnership’s total income and expenses but carries no tax bill. The partnership then issues a Schedule K-1 to each partner showing that partner’s individual share, which the partner uses to complete their personal Form 1040.3Internal Revenue Service. Partners Instructions for Schedule K-1 (Form 1065)
Filing Form 1065 late or incomplete triggers a penalty of $255 per partner per month, for up to 12 months. For a 10-partner LP that files six months late, that’s $15,300 in penalties before anyone looks at the underlying taxes.4Internal Revenue Service. Failure to File Penalty The IRS waives the penalty only if the partnership can show reasonable cause.
Self-Employment Tax
This is where partner classification hits hardest. Self-employment tax covers Social Security and Medicare contributions at 15.3% on net earnings: 12.4% for Social Security up to the annual wage base, plus 2.9% for Medicare on all earnings.5Internal Revenue Service. Self-Employment Tax (Social Security and Medicare Taxes)
General partners owe self-employment tax on their entire distributive share of the partnership’s ordinary business income, plus any guaranteed payments received for services. The IRS treats them as self-employed, so there’s no employer splitting the bill.6Internal Revenue Service. Self-Employment Tax and Partners
Limited partners generally exclude their distributive share from self-employment tax under IRC Section 1402(a)(13). The exception: guaranteed payments a limited partner receives for services actually performed for the partnership are still subject to self-employment tax.7Office of the Law Revision Counsel. 26 USC 1402 – Definitions This treatment is one of the main reasons investors choose LP structures over general partnerships or single-member LLCs.
Who qualifies as a “limited partner” for self-employment tax purposes isn’t fully settled. The Code doesn’t define the term, and courts have reached different conclusions. A January 2026 Fifth Circuit decision in Sirius Solutions v. Commissioner held that any state-law limited partner with limited liability qualifies for the exclusion regardless of how actively they participate. Other circuits haven’t adopted that reasoning, so the answer can depend on where the partnership operates. Getting the classification wrong can trigger back taxes, interest, and penalties.
Loss Deduction Limits
Pass-through losses are one of the draws of an LP investment, but you can’t always deduct them right away. Federal law puts partnership losses through three filters in sequence.
- Basis limitation. You can deduct losses only up to your adjusted tax basis in the partnership. Basis starts with what you contributed and rises with your share of income and additional contributions; it falls with distributions and prior losses. Any loss above basis is suspended and carried forward indefinitely, but if you sell your entire interest while losses are still suspended, those losses are permanently lost.8Office of the Law Revision Counsel. 26 USC 704 – Partners Distributive Share
- At-risk limitation. Even with enough basis, you can only deduct losses to the extent you’re personally “at risk.” That generally means money you’ve invested or personally guaranteed. Nonrecourse debt where you have no personal exposure typically doesn’t count.
- Passive activity limitation. Limited partners are almost always passive participants because they don’t materially participate in the business. Passive losses can only offset passive income from other investments. They can’t reduce wages, salaries, or portfolio income like dividends and interest. Unused passive losses carry forward until you generate passive income or dispose of your entire interest in a taxable transaction.
A loss has to clear basis first, then at-risk, then passive activity. Partners who want to increase deductible losses can do so by contributing additional capital or, in some cases, by taking on a larger share of partnership liabilities that increase basis.
Ongoing Compliance
Most states require LPs to file an annual or biennial report confirming basic information: partnership name, principal office address, registered agent, and general partners. Fees range from under $10 to several hundred dollars, and some states calculate them based on income or number of partners. Missing the deadline can lead to administrative dissolution, which strips the partnership of its legal standing and name protection.
Domestically formed limited partnerships are currently exempt from filing Beneficial Ownership Information (BOI) reports with the Financial Crimes Enforcement Network (FinCEN) under an interim final rule issued in March 2025. Only entities formed under foreign law and registered to do business in a US state are required to file.9FinCEN. Beneficial Ownership Information Reporting The regulatory picture around the Corporate Transparency Act continues to shift, so this exemption could change.
Dissolving a Limited Partnership
Ending an LP takes more than closing the bank account. Dissolution triggers a winding-up period during which the partnership settles its debts, collects what it’s owed, and distributes what’s left. Creditors are paid first, then partners recover their capital contributions, and any surplus is divided according to the partnership agreement.
Once winding up is done, the partnership files a certificate of cancellation with the same state office that received the original certificate. The name on the cancellation must exactly match state records. Filing fees vary by state, and expedited processing is generally available for an extra charge. Until cancellation is filed, the partnership stays on the state’s books and can keep accruing annual report obligations and fees.