DPPs & Limited Partnerships

Direct participation programs (DPPs)

Direct participation programs (DPPs) are investments in businesses that let you participate directly in the business’s profits and losses.

• A DPP can be tied to many kinds of ventures, from a grocery store to an oil drilling operation. Like any investment, you make money if the venture is profitable.
• What makes a DPP different is its business structure. Unlike a typical stock investment, where shareholders have limited involvement in the issuer’s finances, DPP investors share in the issuer’s financial results.
• 🔑 The defining feature of a DPP is its ability to pass through losses to its owners.
• Passing through losses may sound undesirable at first, but in a DPP, those losses can create a tax benefit. When a DPP “passes through” (or “flows through”) losses to investors, it can provide a tax deduction. In general, the more tax-reportable losses an investor has, the less tax they may owe.
• When a DPP spends substantial amounts of money or experiences a business loss, it can allocate that loss to investors, who may be able to claim it as a deduction.

⚠️ Pass-through comparison (exam trap)

• 📌 In a future chapter, you’ll learn about several different forms of DPPs, including general partnerships, limited liability companies (LLCs), and S corporations. This chapter focuses on limited partnerships.

Limited partnerships

• Limited partnerships are a common type of DPP. This business entity includes one or more general partners and one or more limited partners.

• General partners run the business.
• Limited partners provide funding.

• You can think of general partners as the managers and limited partners as the investors. When you invest in a limited partnership, you typically do so as a limited partner.

🔑 General vs. limited partner — liability

The word limited refers to the investor’s liability. As a limited partner, your risk is limited to the amount you invest. For example, if you contribute $100,000, your maximum potential loss is $100,000.

General partners, as the managers of the venture, assume unlimited liability. That means a general partner’s personal assets may be at risk in legal proceedings.

⚠️ Liquidity warning

In general, limited partnership investments involve significant liquidity risk. Typically, there’s no active secondary market for limited partnership units, so selling (liquidating) the investment can be difficult. Because of this, DPPs generally aren’t appropriate for investors who need quick access to their funds.

Organization

• To form a limited partnership, the partnership must file documents with the state where it will primarily operate. These filings typically include the business name, address, and information about the general and limited partners.
• After the filing is accepted, the state issues a certificate of limited partnership. Once the partnership has this certificate, it’s legally formed.
• Each state has its own requirements for forming limited partnerships. For a real-world example of what a state may require, the text links to the protocols from the state of Colorado (the author’s home state).
• The general and limited partners must also put their arrangement in writing. This document is the agreement of limited partnership. It describes the rights, duties, and restrictions of each type of partner, and it explains how revenues and losses will be allocated. The text links to a boilerplate agreement of limited partnership provided by a law firm in California.

🔑 Formation documents

How the roles differ

• General partners must act in a fiduciary capacity when managing the business. This means they must act in the best interest of the partnership and can’t compete with it, borrow from it, or otherwise work against it.
• Limited partners are essentially “the investors.” They don’t have management authority, but they often have voting rights similar to common stockholders. For example, they may vote on changes to the partnership’s objectives and major financial decisions, and they typically have access to the partnership’s books and records.

Subscription agreement and suitability

• Unlike traditional equity and debt offerings, investors usually must complete additional steps to become limited partners. A subscription agreement (essentially an application to invest) is used to evaluate the investor’s suitability for the partnership. General partners often prefer investors who are financially able to commit capital without needing liquidity.
• In addition to suitability, the subscription agreement typically requires the investor to acknowledge the risks involved.
• Registered representatives (like you) often help clients understand the investment well enough to evaluate it.

🔑 Suitability determination items (if a registered rep recommends a limited partnership)

• Some subscription agreements also require the registered representative to certify that the client understands the relevant facts and is suitable for the investment.

Distribution / offering

• To reach potential investors, limited partnerships often use investment banking services.

Dissolution and liquidation

A defining characteristic of limited partnerships is their limited lifespan. Unlike corporations, which can exist in perpetuity, limited partnerships are dissolved at some point.

• Dissolution may be voluntary or required (often due to bankruptcy).
• When a limited partnership is liquidated, debts are paid, remaining assets are sold, and cash is distributed in this order:

🔑 Liquidation priority

Sidenote: Real estate limited partnerships (RELPs)

• Real estate limited partnerships (RELPs) are similar to real estate investment trusts (REITs), which were discussed in a previous chapter. The key difference is the investment structure.

⚠️ RELP vs. REIT

• Beyond structure, RELPs and REITs often operate in similar ways. Both invest in commercial real estate. Some focus on capital appreciation (when property values rise). Others focus on income from mortgages or rent paid by tenants.

Key points

Direct participation programs (DPPs)

• Pass through business returns and losses to investors
• Investor suitability:
  • Seeking tax benefits
  • Comfortable with liquidity risk

Limited partnerships

• Most common form of DPP
• Must contain:
  • At least one general partner
  • At least one limited partner

General partners

• Manage and run the business
• Have unlimited liability

Limited partners

• Provide funding for business
• Have limited liability

Certificate of limited partnership

• Makes the business official
• LP must file partnership documents with the state
• Received from the state when LP is officially formed

Agreement of limited partnership

• Agreement between general and limited partners
• Establishes rights, duties, and restrictions
• General partners must act in a fiduciary capacity
• Limited partners cannot manage

Subscription agreement

• Application to invest in LP
• Establishes an investor’s suitability
• May require certification of investor’s knowledge

Liquidation priority of LP

1. Secured creditors
2. Unsecured creditors
3. Limited partners
4. General partners

Real estate limited partnerships (RELPs)

• Invest in commercial properties
• Various investment goals:
  • Capital appreciation
  • Income
  • Tax benefits

Sources

Primary/official references for the material in this chapter. Every link was fetched and returned HTTP 200 on 2026-08-15.