Limited Partnership Agreement (LPA): Definition & Key Terms

A guide to the limited partnership agreement (LPA)

Author:

The Carta Team

|

Read time:

14 minutes

Published date:

25 June 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.

After the investment period ends, the management fee often steps down. Common step-down structures include reducing the percentage rate or switching the calculation basis from committed capital to invested capital.

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.

How profits flow from the fund back to you and your investors depends on the distribution waterfall structure defined in the LPA.

In almost every waterfall, 100% of the proceeds available for distribution are first distributed to the LPs as a return of capital. After the LPs receive a return of capital, there is some variation around how the next tranche(s) of proceeds are distributed.

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.

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.

Fundraising period

This is the period during which the GP can admit investors as LPs to the fund. The fundraising period typically starts with the fund’s initial closing and ends with its final closing.

Investment period

The investment period is the window during which the GP can deploy capital into new investments. It typically spans the first three to five years of the fund's life.

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.

Recycling

If there’s an exit of a portfolio company during the investment period, rather than distributing the capital to investors, the GP can recycle or reinvest some or all of the proceeds.

Default

The LPA should have mechanisms in place to discourage LPs from defaulting on their capital contribution obligation.

Fund expenses

The fund pays for all of its expenses, which are generally categorized as “organizational expenses” and “operating expenses.”

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.

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 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.

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.

Side letters

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

Why the LPA matters for fund operations

The LPA 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.

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, 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 routinely negotiate terms through side letters or direct LPA amendments during the fundraising process.

What happens if a limited partner defaults on a capital call?

The LPA typically includes default provisions with significant penalties.

What is the difference between an LPA and a private placement memorandum (PPM)?

A PPM is a marketing document used to pitch the fund to potential investors during the fundraising process.