In what situation can a limited partner lose their protection against liability?

A limited partner can lose their protection against liability if they participate in the management or decision-making of the partnership. This is because limited partners are intended to be passive investors who contribute capital while remaining insulated from personal liability for the debts and obligations of the partnership beyond their investment. However, if a limited partner starts to take an active role in managing the partnership, they may be reclassified as a general partner. This shift can expose them to the same personal liability that general partners face, which includes being responsible for the partnership's debts and obligations.

The concept revolves around maintaining the limited partner's status; when they cross the line into active management, they can jeopardize the liability protection intended for their role. The legal structure of limited partnerships is designed to encourage investment while protecting investors, but active involvement in decision-making can change their status and undermine that protection.