National Occupational Competency Testing Institute (NOCTI) Business Practice Exam

What is the function of a limited partnership?

1. Composed solely of general partners

2. Allows limited partners to share profits but limit their losses

3. Offers complete control to limited partners

4. Combines features of a sole proprietorship and a general partnership

The correct answer is: Allows limited partners to share profits but limit their losses

A limited partnership is a specific type of business entity that includes at least one general partner and one or more limited partners. The primary function of this structure is to allow limited partners to invest in the partnership while keeping their liability limited to their investment. This means they can share in the profits but do not partake in managing the business, and if the business incurs debts or legal judgments, their financial risk is capped at the amount they contributed. This arrangement benefits those who wish to invest in a business without taking on the full responsibilities or risks associated with general partners, who manage the business and are personally liable for the partnership’s debts. By offering limited liability protection to the limited partners while still allowing them to benefit from the profits, this structure fosters capital investment while safeguarding investors’ assets beyond their initial contributions. In contrast, options that claim a limited partnership is composed solely of general partners or offers complete control to limited partners do not accurately describe the structure and responsibilities within a limited partnership. The other option suggesting it combines features of a sole proprietorship and a general partnership overlooks the unique characteristics and legal distinctions of limited partnerships, particularly the differentiation in liability and management roles between general and limited partners.