A limited partnership (LP) is a partnership of two or more partners. The general partner oversees and runs the business, while limited partners do not partake in managing the business. However, the general partner of a limited partnership has unlimited liability for the debt, and any limited partners have limited liability up to the amount of their investment. 

The purpose of this form of business is to encourage investors to invest without risking more than the capital they have contributed. However, suppose a limited partner participates in the management of company affairs. In that case, they can be held personally liable, so it is essential to maintain that distance and separation if you form a limited partnership.

The best way to use a limited partnership is to form an LLC or Corporation to be the general partner of your partnership. This limits exposure to the LLC or Corporation, and there is no personal exposure as long as the entities are appropriately maintained. Hedge funds and investment partnerships generally use limited partnerships as they can raise capital without giving up control. Limited partners invest in an LP and have little to no control over the entity's management, but their liability is limited to their investment. Meanwhile, general partners manage and run the LP, but their liability is unlimited.

Forming a limited partnership is easy because it has a less formal structure, and annual meetings are not required. Limited partnerships allow business owners to gain new investments without diluting control.

Here are the most common scenarios where limited partnership should be the way to go:

• Family businesses: Also called family limited partnerships, family businesses typically have multiple investors, but few are equipped to run the business. In such cases, those who put up the required money are the limited partners, whereas those designated to run the business are general partners. The older generation can pass on the management responsibilities to the younger or following generation members, who would eventually inherit the business.
• Professional businesses: In businesses such as law or accountancy firms, the senior partners may want to stay as limited partners. In such cases, they give up their management responsibilities to the general partners.
• Estate planning: If a parent or any family member holds real estate they eventually wish to pass on to an heir, they can start managing the real estate on behalf of the heir. The income produced is provided to the heir, who eventually holds full ownership when the stated terms and conditions of the limited partnership are met.
• Commercial real estate projects are the perfect use case for creating limited partnerships. Limited partners invest in the project and get a return after completion. General partners are the organizers and managers of the construction and maintenance of the project.

A limited partnership is typically formed when someone has a business idea but lacks the necessary financial resources. They then try to find people who believe in the concept and are willing to invest in it.