General Partnership vs Limited Partnership
If you and a close friend plan to pursue a business endeavor together, your first choice is likely to form a partnership. Partnerships are a frequently formed business structure where two or more individuals share ownership, responsibilities, profits, and liabilities. Partnerships can come in many different forms, with general partnerships and limited partnerships being the two most common types.
However, limited partnerships and general partnerships have significant differences in terms of liability, management, and the roles of the partners involved. It is important to know exactly what your roles, duties, and liabilities will be when entering into a partnership with a company or another individual. To ensure that you’re forming an entity that's right for you and your partner(s), let’s review the differences between Delaware General Partnerships and Limited Partnerships.
What is a General Partnership?
A general partnership is the most common type of partnership. It refers to a relationship in which all partners contribute to the day-to-day management of the business. Each partner will have the authority to make business decisions on behalf of the partnership and even legally bind the company in contracts. One of the most important aspects of a general partnership is that all partners have unlimited personal liability. This means that if the business cannot pay its debts or is sued, each partner’s personal assets may be at risk, regardless of who was directly responsible for the issue.
When it comes to general partnerships, no formal filing is required in most states, including Delaware. Once the business is formed, the liabilities, contributions, and responsibilities of the partners are often equal unless stated otherwise. Profits and losses are also typically shared equally among the partners unless specified otherwise. As a result, the business itself does not pay income tax. Instead, taxes pass through to the owners’ personal tax return. Typically, a partnership agreement will describe which partners have certain authorities and responsibilities. A well-drafted partnership agreement can help avoid misunderstandings by clearly defining each partner’s roles and expectations.
It’s worth noting that general partnerships in Delaware don’t require public filings, which offers more privacy.
Why Form a General Partnership?
- Simple set-up process
- Equal control and flexibility
- Pass-through taxation for all members
What is a Limited Partnership?
A limited partnership is a type of business entity where one or more partners are not actively involved in the day-to-day management of the business. Leadership in these businesses is comprised of limited partners and general partners. All limited partners, sometimes referred to as “silent partners,” will serve solely as investors in the business, with the funds they contribute being the extent of their liability. However, the limited partners do not have decision-making power in the company. Limited partnerships will also have at least one general partner, who is responsible for overseeing the day-to-day operations of the business.
Both general partners and limited partners may invest money in the company, though limited partners' personal assets are not at risk if the business incurs debts or legal issues. A general partner may be personally liable for the debts of the company, while a limited partner is not. This means that a general partner’s personal assets (in addition to the business assets) can come into play when it comes to paying off the company’s debts. However, limited partners can lose liability protection if they actively manage the business.
It is also important to note that the General Partner’s name and address are listed on the Certificate of Limited Partnership that is filed with the state, making the General Partner's information public. One solution is to have an LLC serve as the General Partner, but you can also just list a person.
Limited partnerships are a highly popular choice for private equity firms, which purchase privately owned companies with the goal of increasing their value. For example, the Roark Capital Group is a large private equity firm and limited partnership that has invested in companies such as Arby’s, Jamba Juice, Sonic, Maaco, and Meineke. Remember, the benefit of being a limited partner vs a general partner is that your liability is limited, and you can’t lose more money than you invest.
Why Form a Limited Partnership?
- Liability protection for limited partners
- Clear separation of roles
- Attracts passive investors
Limited Liability Partnerships
While less popular than the other two types of partnerships, limited liability partnerships still have a place for some aspiring business owners. LLPs combine elements of a general partnership with liability protection more commonly found in corporations. In an LLP, all partners can take part in managing the business, but unlike a general partnership, each partner is shielded from personal liability for the business’s debts or the misconduct of other partners.
LLPs are especially popular among professional service firms like law offices, accounting firms, and medical practices, where each partner will be liable only for their own misconduct or negligence.
Why Form a Limited Liability Partnership?
- Shared management with liability protection
- Ideal for professionals
Should I Form a General or Limited Partnership?
Choosing between a limited and a general partnership for your business typically depends on your risk tolerance and the roles each member wants to play. If you need equal control among partners, go with a general partnership. If you're bringing on silent investors or want to limit liability for some partners, a limited partnership is likely the better fit.
We recommend that our clients work with an attorney to ensure they understand their liability and protections in any partnership. For clients who wish for all members to have limited liability protection, you can always choose to form a Delaware LLC.
*Disclaimer*: Harvard Business Services, Inc. is neither a law firm nor an accounting firm and, even in cases where the author is an attorney, or a tax professional, nothing in this article constitutes legal or tax advice. This article provides general commentary on, and analysis of, the subject addressed. We strongly advise that you consult an attorney or tax professional to receive legal or tax guidance tailored to your specific circumstances. Any action taken or not taken based on this article is at your own risk. If an article cites or provides a link to third-party sources or websites, Harvard Business Services, Inc. is not responsible for and makes no representations regarding such source’s content or accuracy. Opinions expressed in this article do not necessarily reflect those of Harvard Business Services, Inc.
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There are 6 comments left for General Partnership vs Limited Partnership
Dew said: Thursday, September 23, 2021I set up a DE LLC at HBS last year. I would like to be informed if an LLC can serve as a holding company while a C-Corp will be established for a specific purpose tech product/service
HBS Staff replied: Friday, September 24, 2021Hello Dew,
Yes, we often see an LLC formed to serve as a holding company while a Corporation is established for a specific purpose. Often clients will have sperate companies for all their business ventures so not all their eggs are in one basket. If you have any additional questions we are here to assist.
Shankar Jha said: Tuesday, March 16, 2021great information on General Partnership vs Limited Partnership
HBS Staff replied: Wednesday, March 17, 2021Shankar, Thank you for reading our article and glad you found it helpful. If you have any questions we are here to assist.
John Osborne said: Monday, July 15, 2019"The effectiveness and efficiency of offshore jurisdictions change from time to time depending on various contributing factors. The Bahamas, Panama, and Switzerland have always been major centres for company formation. Despite changes in their banking laws, Switzerland and the Bahamas are still strong contenders however, the strongest is undeniably Panama, since its government has been stable for a long period of time and is firmly invested in the offshore banking sector." - http://confiduss.com/en/services/incorporation/structure/general-partnership/ What do you think about that? What countries do you prefer for partnership jurisdiction? I would be very thankful if you write your TOP 3. Thank you in advance.
HBS Staff replied: Friday, July 19, 2019John, unfortunately this is outside of our area of expertise. We can give you plenty of reasons why Delaware is the most business-friendly state in the U.S., but we are unable to provide a list of other countries and jurisdictions.
Mr. Fenwick said: Tuesday, April 9, 2019What will happen with the Limited Partnership if a General Partner is administratively dissolved? Who will be in charge?
HBS Staff replied: Thursday, April 11, 2019Mr. Fenwick, This would be a question best suited for an attorney as it pertains to your specific company and its partners.
Anwar Hossain said: Tuesday, January 15, 2019If a firm has five general partners & two limited partner then will it be a general partnership firm or a limited partnership firm or both?
HBS Staff replied: Thursday, January 17, 2019Anwar - Typically, clients that want to have both general and limited partners will form a Limited Partnership. If you need assistance determining which type of company to form, please contact via phone, email, or chat for assistance.
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