Limited Partner :
A limited partner (LP) is an investor in a partnership who provides capital to the business but has limited involvement in the company’s operations and management. His liability is limited to his investment in the partnership, meaning he is not personally responsible for the partnership's debts and obligations beyond their initial investment.
What are the important parts of a Limited Partner?
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Limited liability
Unlike general partners, limited partners don’t hold responsibility for the debts and obligations of the partnership. Their risk is confined to the amount of money they have invested.
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Passive role
They do not participate in the management, operations or decision-making. They mainly provide capital and benefit from the profits the partnership generates.
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Passive role
They do not participate in the management, operations or decision-making. They mainly provide capital and benefit from the profits the partnership generates.
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Financial contribution
They contribute capital to the partnership, which finances the business operations, investments, or projects. In return, they receive a share of the profits that is proportionate to their investment.
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Shared profit
The distribution of profits is usually outlined in the partnership agreement and is based on the proportion of their investment.
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Limited involvement
Lp has limited influence over the business's strategic and operational decisions. However, they may have some voting rights on specific matters as defined in the partnership agreement.
Disadvantages of Bootstrap financing :
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Less risk
The limited liability clause reduces the financial risk for LPs, as they are not responsible for the partnership's liabilities beyond their investment.
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Passive income
LPs can earn passive income through their share of the partnership's profits without being involved in the day-to-day operations or management.
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Diversified investment
As an LP, it allows individuals to diversify their investment within various partnerships without managing them actively.
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Tax benefits
It provides tax benefits, as profits are passed to the partners and taxed at their individual tax rates, avoiding double taxation.
Lets Understand with an example
In a venture capital fund, the limited partners contribute capital to the fund but do not participate in the day-to-day management. The general partners (GPs) manage the fund, make investment decisions, and handle the operations. The LPs receive a share of the profits from the fund's successful investments.