General Partnership vs Limited Partnership

general partnership vs limited partnership

When it comes to the two common types of partnerships that often get confused – general partnerships vs limited partnerships – there are some key differences that will impact how each partner participates in the company. 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. This blog on the differences between General Partnerships and Limited Partnerships can help.

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. Each partner will have a partnership account on the books of the company. 

Limited Partnerships

A limited partnership is a relationship where one or more partners are not involved in the day-to-day management of the business. All limited partners, sometimes known as “silent partners,” will serve solely as an investor in the business, with the funds that they contribute being the extent of their liability. However, the limited partners do not have decision-making power in the company, withdrawing funds, etc.

Limited partnerships will 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 contributing funds to purchase the real estate, as long as there is at least one general partner. The benefit of being a limited partner vs a general partner is that your liability is limited, while the downside is that a limited partner will not have the decision-making powers that a general partner has.

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 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.

It is 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 public information. The General Partner is often an LLC, but there are times when we have seen clients choose to list a person as the General Partner.     

We recommend clients will work with an attorney to ensure they understand their liability and protections in any partnership, including General Partnerships and Limited Partnerships. For clients who wish for all members to have limited liability protection, the popular choice is the 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, 2021

I 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, 2021

Hello 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, 2021

great information on General Partnership vs Limited Partnership

HBS Staff replied: Wednesday, March 17, 2021

Shankar, 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, 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.

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