General Partnership vs Limited Partnership
By Devin Scott Tuesday, February 19, 2019
When partnering with a company or an individual, it is often important to know exactly what your roles, duties, and liabilities may be.
There are two common types of partnerships that often get confused: general partnership and limited partnership.
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
A limited partnership is a relationship where the limited partner may not be involved in the day-to-day management of the business. This partner may have just contributed funds to the business, and often the funds that they contribute are the extent of their liability. Limited partnerships will still have at least one general partner to man the day-to-day operations of the business.
The general partner may also be personally liable for the debts of the company, while the limited partner is not. A general partner’s liability is not limited to their investment. Their personal 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.
There have been cases where a limited partner has given up his limited liability status by being too involved in the organizations management. Often clients will work with an attorney to ensure their limited liability is protected as a limited partner. For clients who wish for all members to have limited liability protection, the popular choice is the LLC.
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.
There are 2 comments left for General Partnership vs Limited Partnership
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.
Gabriel Trujillo said: Sunday, August 27, 2017I 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, 2017Here 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:
- 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.
- 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.