A guide to the limited partnership agreement (LPA)

Author:

The Carta Team

|

Read time:

14 minutes

Published date:

June 25, 2026

Learn what an LPA is, including the key economic and governance provisions, and how LPA terms connect to real fund operations.

Contents: Frequently asked questions about limited partnership agreements

What is a limited partnership agreement?

An LPA is the legally binding contract between the general partner (GP) and the limited partners (LP) that governs how a fund operates—from the economic relationship between the GP and LPs to the governance rules that protect both sides. The LPA is the foundational document for any fund that defines every party's rights, obligations, and economic relationship. It establishes the rules before any capital is called or investments are made, and every decision the GP makes during the fund's life traces back to the authority granted in this agreement.

The LPA covers three broad categories of terms. Economic provisions determine how money flows into and out of the fund. Governance provisions establish who has authority, how conflicts are handled, and what oversight mechanisms exist. Operational terms address the fund's duration, reporting requirements, and restrictions on transferring LP interests.

Why are limited partnership agreements important?

The LPA protects both sides of the relationship by defining expectations upfront. For GPs, it provides the legal authority to manage the fund within agreed parameters. For LPs, it offers transparency into how their capital will be managed and legal recourse if the GP acts outside the agreed terms.

LPA terms also play a significant role during fundraising. Market-standard terms build LP confidence and signal that the GP operates within established norms. Non-standard or GP-favorable terms can slow fundraising or deter institutional investors entirely. This is especially true for emerging managers raising a first fund, where LPs scrutinize every provision closely before committing capital.

What are the key economic terms in an LPA?

The economic provisions form the financial framework of the fund. They determine how capital flows in, how the GP is compensated, and how profits are returned to investors.

Management fees

The management fee compensates the GP for running your fund. It covers operating expenses such as salaries, office costs, travel, and other overhead. Typically, the management fee is paid in advance and amounts to 2% of the aggregate commitments during the investment period. According to Carta’s 2025 Fund Economics Report, the median management fee during the investment period is two percent of committed capital, typically paid quarterly in advance.
After the investment period ends, the management fee often steps down.

Carried interest and distributions

Carried interest, commonly called "carry," is the GP's share of fund profits. The standard carry rate is 20% of gains, but the GP only earns it after LPs have received their capital back.

Capital calls

Your LPs do not invest their full commitment on day one. Instead, you issue capital calls over time as investments are identified and fund expenses arise. A capital call is a formal request from the GP to LPs to transfer a portion of their committed capital to the fund. The LPA specifies the minimum notice period for these calls, typically at least 10 business days, though the first capital call after the initial closing may be on less than 10 days’ notice.

Fund term

The fund term is the total lifespan of the partnership commencing the day it begins operations and ending when it is dissolved. For VC and PE funds, this is typically eight to ten years while smaller or newer funds may have a shorter term, as they have less capital to deploy.

GP commitment

The GP commitment is the capital that the GP's principals invest alongside LPs. It typically ranges from one to two percent of total fund commitments and is often called "skin in the game"—a signal that the GP's own capital is at risk alongside yours.

Default

The LPA should have mechanisms in place to discourage LPs from defaulting on their capital contribution obligation. The default provisions can seem a bit draconian (e.g., a forfeiture of a portion of the capital account balance, forfeiture of future profits, forcing a sale of the LP’s interest, etc.), but harsh penalties can help limit defaults (which typically adversely impact the fund).

What governance provisions does an LPA include?

Governance provisions are the safeguards that protect LP interests and establish boundaries on GP authority. These provisions matter most when problems arise: a key GP departs, the fund underperforms, or a conflict of interest surfaces.

GP clawback

The GP clawback requires the GP to return excess carried interest upon final liquidation of the fund back to the fund for distribution to the LPs.

Key person provisions

Key person clauses identify the individuals at the GP whose involvement is essential to the fund's strategy and success.

Indemnification

If the principals, the GP, the investment manager, or their agents and affiliates (“covered persons”) are sued as a result of something they did or didn’t do for the fund, the LPA will typically indemnify the Covered Persons for any and all liabilities, costs, and expenses unless the Covered Persons’ liability arose from the Covered Persons’ gross negligence, bad faith, willful misconduct, or material breach of the LPA or applicable law.

What LP rights are included in an LPA?

LPs have more influence than their passive role might suggest. Embedded throughout the LPA are a set of carefully negotiated LP rights that govern their economic participation, governance input, and access to preferential terms. These rights typically span co-investment opportunities, advisory committee participation, and individually negotiated side letter arrangements that can modify or supplement the standard fund terms.

Co-investments

Many funds offer co-investment rights to LPs and third parties.

Limited partner advisory committee

The LP advisory committee (LPAC) is a group of LP representatives, typically the fund's largest investors, which is formed to address conflicts of interest, approve valuation methods, extend time periods, approve investments that would otherwise be restricted, review key person events, and other matters requiring independent oversight.

Side letters

The terms of the LPA may be modified by side letters or agreements with certain LPs.

GP removal

Most LPAs allow the LPs to remove the GP for “cause” (e.g., if the principals or GP engage in embezzlement, fraud, or bad faith).

Why the LPA matters for fund operations

The LPA is not a document that sits in a drawer after fund closing. It governs almost every operational decision throughout the fund's life. When the GP executes a capital call, it must follow the notice periods and default provisions specified in the LPA. When the fund distributes proceeds, the calculation must conform to the waterfall structure and preferred return terms defined in the agreement.

Frequently asked questions about limited partnership agreements

What is the purpose of a limited partnership agreement?

An LPA defines the rights, obligations, and economic terms between the GP and LPs, providing the legal framework that governs how the fund operates from formation through liquidation.

What are the disadvantages of a limited partnership?

For GPs, unlimited personal liability for fund obligations is the primary risk. For LPs, the main drawback is limited control over investment decisions and fund management despite having significant capital at stake.

What is the difference between an LPA and an operating agreement?

An LPA governs a limited partnership, which is common for VC and PE funds, while an operating agreement governs an LLC business structure.

Can limited partnership agreement terms be negotiated?

Yes. While LPA terms should fall within market norms, LPs, especially institutional investors, routinely negotiate terms through side letters or direct LPA amendments during the fundraising process.