What Is an Investment Partnership?

An investment partnership allows individuals and entities to combine financial resources for collective investment. This pooling of capital enables them to pursue larger or more diversified investment opportunities than might be accessible individually. The primary goal is to generate returns through strategic investments.

Defining an Investment Partnership

An investment partnership is a legal business structure formed by two or more parties who combine their capital to pursue shared investment objectives. Its central purpose is to make investments in various assets, such as stocks, bonds, real estate, or private equity, rather than engaging in the active trade or business of selling goods or services.

This structure is typically organized as a partnership, differing from corporate entities that operate a conventional business. The partnership agreement outlines how capital is contributed, how profits and losses are shared, and the overall investment strategy.

Structure and Roles within an Investment Partnership

Investment partnerships commonly adopt a structure involving distinct roles: the General Partner (GP) and Limited Partners (LPs). The General Partner is responsible for actively managing the partnership’s investments, making all investment decisions and overseeing daily operations. This active management role means the General Partner typically bears unlimited liability for the partnership’s obligations, exposing their personal assets to any debts or legal claims.

In contrast, Limited Partners are passive investors who contribute capital but do not participate in management or investment decisions. Their involvement is primarily financial, and their liability is generally limited to the amount of capital invested or committed. This limited liability protects their personal assets beyond their initial investment. The General Partner directs how funds are deployed according to the partnership’s investment mandate.

Taxation of Investment Partnerships

Investment partnerships typically benefit from “pass-through” taxation, meaning the partnership itself generally does not pay federal income tax. Instead, the partnership’s income, gains, losses, deductions, and credits are directly “passed through” to the individual partners. Each partner is then responsible for reporting their share of these items on their own personal tax return, regardless of whether the actual cash was distributed to them. This avoids the “double taxation” that can occur with corporations, where profits are taxed at the corporate level and again when distributed to shareholders.

To facilitate this process, the partnership provides each partner with a Schedule K-1 (Form 1065) annually. This Internal Revenue Service (IRS) form details the partner’s proportionate share of the partnership’s financial results for the tax year. Partners use the information from their Schedule K-1 to accurately prepare their individual income tax returns (Form 1040). The character of the income, such as ordinary income or capital gains, generally retains its nature as it passes through to the partners, affecting how it is taxed on their personal returns.