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

A 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