This section is from the book "Business Finance", by William Henry Lough. Also available from Amazon: Business Finance, A Practical Study of Financial Management in Private Business Concerns.
In an effort to overcome the disadvantages incident to the partnership relation, many enterprises, especially in Great Britain and the British colonies, have been organized as "joint-stock" companies, which may be briefly defined as a form of limited partnership. In the United States, as we shall see, this movement, though of some importance, has not gone very far because of the superior advantages of the corporate form.
A limited partnership may only be formed under special laws. It differs from an ordinary partnership in that one or more of its partners are silent or inactive; they share in the profits but take no part in the management of the business. The liability of these partners is limited to the amount actually invested by them in the business. These partners whose liability is limited are called special partners in contradistinction to the her general partners. To secure this restricted liability it necessary to comply closely with the statutory provisions. The procedure necessary to form a limited partnership is almost as formal as the incorporation of a stock company, and failure to observe the required formalities may result in making the special partners liable as general partners. Sometimes it is attempted to secure the benefits of this limited liability without complying with the state law. In such case, the individual who invests his money keeps the matter secret and is known as a dormant or "sleeping" partner. If the arrangement is discovered, he would be liable in exactly the same way and to the same extent as an active partner.