Each product here sells one feature, from tax write-offs to protected principal. Each also hides a mechanical catch, and the exam expects you to name it.
A limited partnership (LP) lets investors share in a business's profits and tax deductions without running it or risking their other assets. It has two kinds of owners:
- General partner (GP): The GP runs the business and owes the limited partners a fiduciary duty.
- Limited partners: Limited partners contribute capital, take no part in management and risk only their investment.
Private equity funds also use this structure, including venture capital funds for early-stage companies and buyout funds.
The partnership agreement, certificate of limited partnership and subscription agreement set the terms:
- Partnership agreement: This contract sets the GP's powers and pay. It also sets how income, losses and cash are shared.
- Certificate of limited partnership: The GP files it with the state. Filing creates the partnership as a legal entity on public record.
- Subscription agreement: This is the investor's application to buy units, and it shows the investor's financial suitability. The GP accepts it by signing.
Common mistakes
- Multiplying the period's index return by the leverage factor. Chain the daily returns instead.
- Reading "longer than one trading session" as "long term." A daily-reset fund held for two weeks is already past the FINRA line.
- Thinking passive losses vanish, or that selling half the interest frees them. Only a fully taxable sale of the entire interest does.
Bottom line
- The GP runs an LP, owes limited partners a fiduciary duty and has unlimited liability; limited partners contribute capital, take no part in management and risk only their investment.
- An LP pays no income tax (IRC 701 and 702); each partner is taxed on the Schedule K-1 share whether or not cash is paid.
- A limited partner's loss is deductible only up to the amount at risk (IRC 465).
- A limited partner's losses are passive, carry forward and are freed only by a fully taxable sale of the entire interest (IRC 469).
Exam shortcut
If a stem says a client held a leveraged or inverse fund for weeks, or used one as a long-term hedge, the answer turns on the daily reset. Reject any choice that simply multiplies the period's index return. If a product's name includes "note," ask who owes the money. The answer is a bank, so issuer credit risk is in play.
The full lesson (about 3,760 words, 25 min read) adds 2 worked examples, all 5 common mistakes, a self-check, free in the app.
Learning objectives
- B16
Browse all free Series 65 lessons or jump into free Series 65 practice questions.