Limited Partnership
A legal structure with a general partner who manages the fund and limited partners who invest passively with liability capped at their capital.
Definition
A limited partnership is a legal entity with two classes of partner: at least one general partner, who manages the business and bears unlimited liability for its obligations, and one or more limited partners, who contribute capital and share in profits and losses but take no management role and whose liability is capped at their committed capital. It is the dominant legal form for actively managed hedge-fund-style vehicles, both onshore and offshore.
In the US, limited partnerships are formed under state law — Delaware is the overwhelming default because of its flexible statute and deep body of case law — while offshore funds commonly use an exempted limited partnership under Cayman Islands law, which achieves the same GP/LP economic split with tax-neutral treatment. Both are governed by a limited partnership agreement that sets out management authority, fee terms, distribution mechanics, and investor rights.
A limited partnership is a flow-through (pass-through) tax entity: it pays no entity-level income tax itself; profits and losses pass through directly to the partners, who report them individually. This is distinct from a fund structured as a corporation, which can face entity-level tax before any distribution to shareholders.
Why it matters
The limited partnership form is what makes the GP/LP economic split — active manager, passive capital, capped LP liability — legally enforceable rather than just a business convention. Every fee term, capital call mechanic, and distribution waterfall a fund runs is ultimately grounded in provisions of the partnership agreement, not informal understanding.
Pass-through taxation avoids the double taxation a corporate structure could otherwise impose, which is a major reason limited partnerships remain the default vehicle for actively managed funds despite corporations being simpler in other respects.
Common mistakes
Assuming a limited partnership always means an onshore US vehicle — offshore exempted limited partnerships under Cayman or similar law use the identical GP/LP economic structure while achieving tax-neutral, non-US treatment.
Treating the limited partnership agreement as boilerplate — it is the actual contract governing fee terms, capital calls, the distribution waterfall, and GP discretion; LPs and their counsel typically negotiate specific provisions rather than accepting a template unread.
Confusing a limited partnership with a limited liability company (LLC) — both offer liability protection, but an LLC has no GP/LP economic split; a fund's own general partner entity is itself commonly formed as an LLC, layered inside the limited partnership structure.
Assuming pass-through taxation means no tax reporting burden — partners still receive annual tax allocation statements (a K-1 in the US) and must report their share of the partnership’s income individually, even though the partnership itself owes no entity-level tax.
In practice
A crypto fund organized as a limited partnership tracks each LP’s contributions, allocations, and withdrawals in that investor’s own capital account — the mechanism through which crypto-specific NAV swings, fee crystallizations, and distributions ultimately land on an individual investor’s position, rather than being tracked only at the fund level.
For a solo-GP or two-person crypto fund, the limited partnership is typically the first legal vehicle formed, often paired later with an offshore feeder once non-US or tax-exempt demand appears — see master-feeder structure for how that pairing works.
Questions, answered
What is a limited partnership in fund management?
A limited partnership is a legal structure with a general partner who manages the fund and bears unlimited liability, and one or more limited partners who invest passively with liability capped at their committed capital. It is the standard legal form for actively managed hedge-fund-style vehicles.
Why is Delaware the default state for fund limited partnerships?
Delaware is used overwhelmingly for US fund limited partnerships because of its flexible partnership statute and the extensive body of case law interpreting it, which gives managers and investors more certainty about how partnership agreement provisions will be enforced.
Is a limited partnership taxed as an entity?
No. A limited partnership is a pass-through entity — it pays no income tax itself. Profits and losses flow through directly to the general and limited partners, who report their share individually.
What is the difference between a limited partnership and an LLC?
Both limit certain partners’ or members’ liability, but a limited partnership has a distinct general partner/limited partner economic split with different management rights and liability treatment for each, while an LLC has no such split among its members. A fund’s general partner entity is itself often formed as an LLC.
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