General Partnership vs Limited Partnership

By Devin Scott, Michael Kupfer Tuesday, February 19, 2019

general partnership vs limited partnership

When entering into a partnership with a company or another individual, it is important to know exactly what your roles, duties, and liabilities will be. When it comes to the two common types of partnerships that often get confused – general partnerships and limited partnerships – there are some key differences that will impact how each partner participates in the company.

General Partnerships

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 and even legally bind the company in contracts.

The liabilities, contributions, and responsibilities of the partners are often equal unless stated otherwise. Typically, a partnership agreement will describe which partners have certain authorities and responsibilities.

Limited Partnerships

limited partnership is a relationship where one or more partners are not involved in the day-to-day management of the business. Often, a limited partner, sometimes known as a “silent partner,” will serve solely as an investor in the business, with the funds that they contribute being the extent of their liability. However, since the limited partner does not have decision-making power in the company, withdrawing funds – even just the amount they’ve already contributed – cannot be done without the approval of a general partner.

Limited partnerships will still have at least one general partner to man the day-to-day operations of the business. A general partner may invest money into the company. However, a general partner may also be personally liable for the debts of the company, while the limited partner is not.  Only 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.

A common purpose of a limited partnership is for real estate. There may be several limited partners for the purpose of raising additional funds to purchase the real estate, as long as there is at least one general partner. The benefit of being a limited partner is so your liability is limited, while the downside is that a limited partner will not have the decision-making powers that a general partner would.

Similarly, limited partnerships are an extremely popular choice for private equity firms, which purchase privately-owned companies in the hopes of increasing their value. Often, the private equity company’s name is not particularly well-known compared to the companies it invests in. 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.

There have been cases where a limited partner has unintentionally given up his limited liability status by being too involved in the organization’s management. This determination can be made by a court if a lawsuit is filed alleging that the limited partner has participated in the day-to-day activities.

Types of Limited Liability Companies

A limited partnership is not the only business structure that offers limited liability protection to its partners. In fact, the most common type of business structure is the LLC, or limited liability company.

LPs vs. LLCs

There are a number of differences between LLCs and LPs, but the most notable is that an LLC provides limited liability protection for each of its members, while providing plenty of flexibility for defining each member’s role. The limited partnership will expose any general partners to personal liability as well.

LLPs and LLLPs

In addition, there are two other types of limited liability business structures:

  • Limited Liability Partnership (LLP) – Similar to an LLC, an LLP provides each of its partners with limited liability protection, as well as the ability to manage the business directly. However, unlike an LLC, partners in an LLP are only legally responsible for their own actions and cannot be held liable for the negligence of other partners.
     
  • Limited Liability Limited Partnership (LLLP) – A newer entity type that is a variation of the basic LP. In an LLLP, there is a combination of at least one limited partner and at least one general partner. However, unlike in an LP, general partners in an LLLP also receive limited liability protection.

We recommend clients will 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, the popular choice is the LLC.

Next: Intro to Limited Partnerships

 

 

Disclaimer

THE AUTHOR OF THIS BLOG ARTICLE IS NOT A LAWYER AND HARVARD BUSINESS SERVICES, INC. IS NOT A LAW FIRM. THE ARTICLE ABOVE IS NOT INTENDED AS LEGAL ADVICE AND SHOULD NOT BE TAKEN AS LEGAL ADVICE. THIS SHORT ARTICLE IS STRICTLY TO MENTION SOME ASPECTS OF DELAWARE’S CORPORATION LAWS AND/OR LAWS RELATING TO OTHER FORMS OF ENTITIES WHICH YOU MAY NOT BE FAMILIAR WITH. WE RECOMMEND THAT YOU CONSULT WITH A LAWYER BEFORE FORMULATING A STRATEGY WHICH WILL BE SUITABLE FOR YOUR SPECIFIC CASE.

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There are 4 comments left for General Partnership vs Limited Partnership

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, 2019

John, 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, 2019

What will happen with the Limited Partnership if a General Partner is administratively dissolved? Who will be in charge?

HBS Staff replied: Thursday, April 11, 2019

Mr. 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, 2019

If 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, 2019

Anwar - 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.

Gabriel Trujillo said: Sunday, August 27, 2017

I do have an LLC and I would like to raise funds for apartments projects ground up construction would an LP be what I need?

HBS Staff replied: Monday, August 28, 2017

Here is some information on LPs. Feel free to call us during normal business hours for more information or to form an LP. You can also Live Chat with us from our homepage. 302-645-7400.

Limited Partnerships are typically formed by individuals or corporations who want to maintain 100% of the control of an asset or project while including investors or heirs on the income from the Limited Partnership.

Limited Partnerships do not have stock or stockholders. Each Limited Partner has a specifically stated percentage of interest in the income from the entity.

Limited Partners do not receive dividends but are entitled to their share of the income.

Delaware Limited Partnerships may have any number of limited partners.

Limited Partnerships are typically utilized for two main purposes:

  1. To develop commercial real estate projects where the General Partner(s) is the organizer and manager of the construction and maintenance of the project, and the Limited Partner(s) is the investor who puts up the money for the project and then gets a return from the completed project's income stream. A Limited Partner(s) is a passive investor in this scenario. Shopping malls and apartment complexes are just a few of the typical projects that might be built and managed utilizing a Limited Partnership.
  2. To use as an estate planning vehicle where the General Partner(s) is the parent who holds real estate (usually commercial real estate) and the Limited Partners are the heirs of the General Partner. This type of Limited Partnership is sometimes referred to as a "Family Limited Partnership." Typically, this is used when the asset in the Limited Partnership has an income stream and the parties do not want it to be sold upon the death of the General Partner.

No court can reach into the assets of a Limited Partner in order to satisfy debts or obligations of the Limited Partnership as a business entity.

 

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