What is an LP

At Towerstone Accountants we provide specialist limited company accountancy services for directors and owner managed businesses across the UK. We wrote these guides for people running a company who want clear answers on tax, payroll, Companies House duties, and day to day compliance without jargon. Our aim is to help you understand your responsibilities, reduce the risk of penalties, and know when to get professional support.

This is a question I am asked surprisingly often, usually by people who have come across the term LP when setting up a business, looking at property investment structures, or reading about partnerships online. The term sounds technical, and it is often confused with limited companies or LLPs, but an LP, which stands for Limited Partnership, is a very specific legal structure with its own rules, advantages, and risks.

In this article I am going to explain clearly what an LP is, how it works in the UK, who it is suitable for, how it is taxed, how it differs from other business structures, and the common mistakes I see in practice. I will also explain why LPs are less common than they once were, and why they still exist despite that. I am writing this as a chartered accountant who advises businesses and partnerships regularly, and everything here is grounded in current UK practice rather than theory.

What an LP actually means

An LP is a Limited Partnership. It is a type of partnership structure that involves two different kinds of partners, general partners and limited partners. This distinction is central to how an LP works and how risk and responsibility are divided.

In a traditional partnership, all partners share responsibility for running the business and are personally liable for its debts. In an LP, that responsibility is split.

In simple terms:

• At least one partner manages the business and has full responsibility
• At least one partner invests money but does not manage the business
• The managing partner has unlimited liability
• The investing partner has limited liability

This structure is designed to allow investors to contribute capital without being involved in day to day management, while still allowing the business to operate as a partnership rather than a company.

The two types of partners in an LP

Understanding the difference between the two types of partners is essential.

General partners
General partners are responsible for running the business. They make decisions, enter into contracts, and manage operations. In return for this control, they take on full personal liability for the debts and obligations of the partnership.

This means:

• They are responsible for management
• They can bind the partnership legally
• They are personally liable for debts
• Their personal assets can be at risk

Limited partners
Limited partners are usually investors. They contribute capital to the partnership but do not take part in management.

In return, their liability is limited to the amount they have invested, provided they follow the rules.

This means:

• They do not manage the business
• They do not make operational decisions
• Their liability is limited to their investment
• Their personal assets are generally protected

The moment a limited partner starts acting like a general partner, for example by signing contracts or running the business, they risk losing that limited liability protection.

How an LP is formed in the UK

An LP must be registered, it does not exist automatically just because people agree to work together.

To form an LP in the UK, you must:

• Have at least one general partner
• Have at least one limited partner
• Register the partnership with Companies House
• Provide details of partners and capital contributions

Unlike a limited company, an LP does not have share capital, and unlike an LLP, it is not a separate legal entity in the same way.

Once registered, the LP has legal recognition, but it remains fundamentally a partnership rather than a corporate body.

Is an LP a separate legal entity

This is an area that causes confusion.

An LP in England and Wales is not generally treated as a separate legal person in the same way as a limited company. The partnership exists as a relationship between partners rather than as a fully separate entity.

In practice, this means:

• Contracts are entered into by partners on behalf of the partnership
• Liability ultimately rests with the partners
• The partnership itself does not pay tax

This distinction matters when comparing LPs with limited companies and LLPs.

How an LP is taxed

One of the defining features of an LP is how it is taxed. An LP is tax transparent. This means the partnership itself does not pay Income Tax or Corporation Tax on its profits.

Instead:

• The partnership calculates its profits
• Profits are allocated to partners
• Each partner is taxed individually on their share

The type of tax each partner pays depends on who they are.

For example:

• Individual partners pay Income Tax on their share
• Corporate partners pay Corporation Tax on their share

This is similar to how traditional partnerships are taxed, and very different from limited companies.

How profits are shared in an LP

Profit sharing in an LP is governed by the partnership agreement. There is no requirement for profits to be split equally, and the split does not need to match capital contributions.

For example:

• A limited partner might contribute most of the capital
• A general partner might contribute expertise and management
• Profits can be split to reflect this

What matters is that the agreement is clear and consistently applied.

Do LPs need accounts

Yes, but the requirements are different from limited companies.

An LP must:

• Keep proper accounting records
• Prepare accounts to calculate profits
• File partnership tax returns

However, LPs do not usually file full statutory accounts at Companies House in the same way limited companies do, unless specific circumstances apply.

This lighter filing burden is one reason LPs were historically popular.

What is a partnership agreement and why it matters

A partnership agreement is not legally mandatory, but in practice it is essential.

The agreement sets out:

• Who the partners are
• Who is a general partner and who is limited
• How profits and losses are shared
• How decisions are made
• What happens if someone leaves

Without a clear agreement, disputes can arise very quickly, and default partnership law may apply instead, often with unintended consequences.

What an LP is commonly used for

LPs are less common today than they once were, but they are still used in specific situations.

Common uses include:

• Property investment structures
• Private equity and investment funds
• Family investment arrangements
• Joint ventures with passive investors

In these situations, the separation between management and investment can be useful.

How an LP differs from a sole trader

A sole trader is a single individual running a business. There is no separation between the person and the business.

An LP:

• Has multiple partners
• Separates management and investment
• Allows limited liability for some partners

A sole trader structure is simpler, but offers no liability protection at all.

How an LP differs from a traditional partnership

In a traditional partnership:

• All partners manage the business
• All partners have unlimited liability

In an LP:

• Only general partners manage
• Limited partners have restricted involvement
• Liability is split

This distinction is the whole point of the LP structure.

How an LP differs from an LLP

This is one of the most important comparisons.

An LLP:

• Is a separate legal entity
• Gives all members limited liability
• Has corporate style filing requirements

An LP:

• Is a partnership structure
• Gives limited liability only to limited partners
• Leaves general partners fully exposed

In modern practice, many businesses choose LLPs instead of LPs because they offer broader liability protection.

Why LPs are less popular today

LPs were historically popular, particularly in investment structures, but their use has declined.

Reasons include:

• Increased use of LLPs
• Greater focus on transparency
• Higher risk for general partners
• Changes in regulation and perception

In many cases, LLPs now achieve similar aims with fewer risks.

Risks and disadvantages of an LP

LPs are not without drawbacks.

Key risks include:

• Unlimited liability for general partners
• Loss of limited status if rules are breached
• Complexity compared to simpler structures
• Less flexibility than companies in some areas

These risks need to be understood before choosing an LP.

Common mistakes I see in practice

The most common problems I encounter include limited partners becoming too involved in management, poorly drafted partnership agreements, misunderstanding tax transparency, and assuming an LP offers the same protection as an LLP.

These misunderstandings can have serious consequences.

Is an LP right for you

Whether an LP is appropriate depends entirely on your circumstances, goals, and risk appetite.

LPs can work well where:

• There are passive investors
• Management is clearly defined
• Tax transparency is desired

They are usually less suitable for small trading businesses or situations where all partners want limited liability.

Final thoughts

An LP is a specific and relatively specialised business structure. It is neither a limited company nor an LLP, and it should not be chosen without understanding how it works. While it still has a place in certain investment and partnership arrangements, it is no longer the default option for most businesses.

If you are considering using an LP, professional advice is essential, because getting the structure wrong can expose individuals to far more risk than they expect.

You may also find our guidance on what does lp stand for and what is unlimited liability in business helpful when exploring related limited company questions. For a broader overview of running and managing a company, you can visit our limited company hub.