Limited partner (LP) and general partner (GP) are the two roles in a private investment fund structured as a limited partnership — the GP runs the fund and bears unlimited liability, while LPs supply most of the capital and whose liability is capped at what they invested.
In plain terms
Nearly every hedge fund and private equity fund is legally a limited partnership with one general partner — the management firm — and dozens or hundreds of limited partners, who are the outside investors: pensions, endowments, family offices, and individuals. The GP makes every investment decision and is personally on the hook for the partnership’s obligations. LPs have no say in day-to-day decisions and, in exchange, cannot lose more than what they committed.
How it works
The liability split exists because a limited partnership is not a corporation — someone in the structure has to bear unlimited personal liability, and that is the general partner by default. Historically, a limited partner who got too involved in running the business risked being treated as a general partner and losing that liability cap — the “control rule.” Delaware eliminated it outright: under 6 Del. Code § 17-303, a limited partner keeps full liability protection no matter how extensively they exercise rights like voting on major decisions, sitting on an advisory committee, or acting as a consultant to the GP — a safe harbor that made Delaware the default jurisdiction for US funds.
Tax law treats the roles just as differently. Under Internal Revenue Code § 469 and its regulations, a limited partner is presumed not to materially participate in the partnership’s business, which routes any losses into the passive-activity bucket where they can only offset passive income. A general partner has access to all seven of the regulatory tests for material participation; a limited partner, by default, has access to only three.
The numbers
- Delaware’s safe harbor: an open-ended list of specific activities (voting, serving on a committee, consulting, guaranteeing debt) that a limited partner can do without losing limited liability, codified at 6 Del. Code § 17-303.
- Material participation tests available: 7 for a general partner, versus 3 for a limited partner, under the Section 469 regulations.
- GP’s liability exposure: unlimited and personal for partnership obligations, unless the GP itself is a corporation or LLC — which is why the “general partner” of a fund is almost always an entity, not an individual.
- LP’s liability exposure: capped at the amount committed to the fund, once called via a capital call.
What people get wrong
That “general partner” and “limited partner” describe how much money someone put in. They describe legal exposure and control, not investment size — a GP entity is frequently owned by the people who founded the fund and may have contributed a small fraction of total capital (often alongside a much larger LP commitment of their own personal money into the same fund), while the LPs supplying the bulk of the capital have zero say in individual deals. The other common error is assuming the old “control rule” still applies. In Delaware and most other modern jurisdictions it has been replaced by a specific safe harbor, so an LP can now sit on an advisory committee or vote on removing the GP without risking their liability shield.
Related
Read more: Hedge Funds and Private Equity: The Other Engine of Modern Finance Wealth · Alternative Assets: Investing Beyond Stocks and Bonds
See also: Two and twenty · Hurdle rate · Distribution waterfall · Capital call