What Is a Capital Account in a Limited Partnership?

A limited partnership is an organizational structure often used by attorneys or real estate investment entities. It allows individuals to own an interest in or invest in a partnership while limiting exposure to liabilities the business may incur in the course of conducting business. As with all businesses, the owners contribute start-up funds and may contribute additional funds to fuel expansion. In a limited partnership, these funds provide the basis for a capital account.

When two or more people form a limited partnership, they contribute cash, assets or even services to start and grow the business. The separate tracking of each person's contribution is done in what is referred to as a "capital account." Capital accounts are typically created by the limited partnership agreement and are maintained to assist with partnership accounting. These accounts aid in determining the allocation of each partner's claim on the partnership's money and assets.

Capital accounts help each partner calculate what she should receive when the partnership, or an interest in the partnership, is sold or liquidated. Each limited partner's capital account lists all the contributions and withdrawals made by that partner, including that partner's annual proportionate share of the partnership's income. Therefore, the limited partner's capital account provides a partner's accounting history during her participation in the partnership. In addition, the capital account helps in tracking the limited partner's investment for tax preparation purposes.

Partners are owners, not employees, in a partnership. A partner's claim or right to the partnership assets is based on his percentage ownership, which is determined by the amount in his capital account and by the agreement specified in the partnership contract. Like book value in other companies, a partnership's aggregate capital accounts may not reflect the market value of the partnership. A limited partnership's capital account is the aggregate of all the limited partners' and general partner's capital accounts.

A limited partnership is made up of two levels of partners, limited and general. Limited partners have limited liability, which means any loss attributed to a limited partner is limited to the amount of her investment in the partnership. Unlike the general partner, limited partners do not actively participate in the management of the limit partnership. The general partner handles all the management duties and accepts unlimited liability for debts and obligations incurred by the limited partnership.