Limited PartnerEdit
A limited partner is a member of a limited partnership who contributes capital but does not participate in the day-to-day management of the business. The arrangement is most common in private markets such as private equity, venture capital, and real assets, where investors pool funds and rely on a separate manager to operate the enterprise. In this setup, the limited partner’s liability generally extends only to the amount of capital contributed, while the general partner runs the fund and bears responsibility for its management. The distinction between limited partners and general partners is central to how these funds are structured, governed, and taxed. Limited partnership General partner Private equity Venture capital
Limited partners typically include large institutions and wealthy individuals who seek exposure to private markets without taking on the daily responsibilities of running a fund. Common examples are Pension fund, Endowment fund, Sovereign wealth fund, Family office, and high-net-worth individuals. By committing capital rather than managing operations, these investors can diversify their portfolios and gain access to specialized investment strategies that are not available through public markets. The general partner, by contrast, is responsible for sourcing deals, performing due diligence, and managing investments through to exit. Institutional investor Private equity Venture capital
Structure and roles
The relationship is codified in a Limited partnership agreement (LPA), which defines the rights, duties, and obligations of both limited partners and general partners, including allocations, governance processes, and remedies for breaches. Limited partnership agreement
Limited partners contribute capital commitments and receive quarterly or annual updates on fund activity; they typically do not manage the fund. If they do participate in management beyond specific reserved matters, they risk losing their limited liability status. Capital commitment Capital call Limited liability
A governing mechanism often present is an LP Advisory Committee or similar body that helps oversee conflicts of interest, related-party transactions, and certain governance issues. This structure helps maintain investor confidence and “arms-length” decision-making. Advisory committee
The general partner(s) perform active management, including selecting investments, negotiating terms, and ultimately exiting positions. The fund’s performance is usually measured against objectives set in the LPA, with compensation tied to upside through a mechanism known as carried interest. Carried interest
A common feature in many funds is a distribution waterfall, which maps how profits are allocated between limited partners and general partners. A preferred return (or hurdle rate) may be paid to LPs before GP profits are shared, with catch-up provisions allowing the GP to participate more as performance exceeds thresholds. Waterfall distribution Preferred return
Financial reporting uses capital accounts and regular disclosures; tax reporting for LPs is typically through pass-through taxation, with each LP receiving a Schedule K-1 reflecting its share of income, deductions, and credits. Schedule K-1 Pass-through taxation
Economics and taxation
Limited partners contribute to the fund and participate in its profits and losses proportionally to their capital commitments, subject to the terms of the LPA. Their upside largely depends on the fund’s ability to generate gains from its investments, while downside is generally limited to the contributed capital. Capital contribution Limited liability
Tax treatment in many jurisdictions (notably the United States) treats most private funds as pass-through entities for tax purposes, meaning the fund itself is not taxed at the entity level; instead, investors report their share of income on their own tax returns. This is a key consideration for LPs when evaluating expected after-tax returns. Pass-through taxation Schedule K-1
Carried interest remains a point of debate in public policy discussions. It offers a significant share of profits to general partners as a reward for performance, but critics argue it creates favorable tax treatment relative to ordinary income. Proponents say it aligns incentives and attracts skilled managers who can generate gains for LPs. The discussion stays primarily within the realm of tax and regulatory policy rather than fund mechanics. Carried interest
Regulation and governance
The operation of limited partnerships is governed by state law in many jurisdictions, with model statutes such as the Uniform Limited Partnership Act influencing common provisions. Jurisdictions with a long-running fund ecosystem, such as Delaware, are popular due to predictable legal frameworks and established commercial infrastructure. Delaware Uniform Limited Partnership Act
Private funds also navigate securities and investment-advice regulation. Private placements are often exempt from some registration requirements under securities laws, but fund managers and advisers can be subject to exemptions and disclosure requirements under acts such as the Investment Advisers Act of 1940 or related regulations. Private placement Investment Advisers Act of 1940
Governance concerns include ensuring appropriate alignment of interests between LPs and GPs, managing conflicts of interest, and providing transparency while preserving the confidentiality that many investors seek. The LPAC or equivalent bodies are one mechanism used to address these concerns. Fiduciary duty
Advantages and limitations
For limited partners, the primary advantages are limited liability, access to professionally managed portfolios, diversification, and exposure to private markets that can offer higher return potential than public markets. Limitations include illiquidity (funds are typically locked up for several years), capital-call structures that require liquidity planning, and variability in fund performance. Capital commitment Liquidation preference
For general partners, the model provides a structured way to raise substantial capital and align incentives through carried interest, while delegating daily management to experienced investment professionals. Risks include dependence on manager reliability, deal flow, market cycles, and potential reputational consequences if performance falters. General partner Carried interest
Controversies and debates
The limited partnership structure is sometimes criticized for opacity and governance gaps, especially regarding fees, transparency, and the balance of power between GPs and LPs. Critics argue that the fee-heavy model (including management fees and carried interest) can reduce net returns for investors, particularly in longer-running funds. Proponents contend that the structure rewards fund managers for identifying and executing complex investments and aligns incentives to achieve robust long-run performance. Debates often focus on best practices for disclosure, governance, and alignment of interests, as well as potential reforms to enhance transparency while preserving the ability to attract skilled managers. Fee structure Governance in private equity Transparency (corporate)
There is also ongoing discussion about access and inclusivity in private markets. While the LP base is broad, some argue that participation remains concentrated among large institutions, with barriers for smaller investors, though some fund structures and vehicles seek to broaden access through co-investments and fund-of-funds arrangements. Access to private equity Co-investment (finance) Fund of funds