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.
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.
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.
Harvard Business Services, Inc. is not a law firm and any information contained in this blog shall not be construed as legal advice. For more information on your formation options, call Harvard Business Services at 1-800-345-2677.