General Partnership vs Limited Partnership
If you and a close friend plan to pursue a business endeavor together, your first choice is likely to form a partnership. Partnerships are a frequently formed business structure where two or more individuals share ownership, responsibilities, profits, and liabilities. Partnerships can come in many different forms, with general partnerships and limited partnerships being the two most common types.
However, limited partnerships and general partnerships have significant differences in terms of liability, management, and the roles of the partners involved. 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. To ensure that you’re forming an entity that's right for you and your partner(s), let’s review the differences between Delaware General Partnerships and Limited Partnerships.
What is a General 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 on behalf of the partnership and even legally bind the company in contracts. One of the most important aspects of a general partnership is that all partners have unlimited personal liability. This means that if the business cannot pay its debts or is sued, each partner’s personal assets may be at risk, regardless of who was directly responsible for the issue.
Get answers for all your business needs
Not sure what’s right for your company? Speak directly with our specialists and get clarity before you make your next move.
Talk to an expert
When it comes to general partnerships, no formal filing is required in most states, including Delaware. Once the business is formed, the liabilities, contributions, and responsibilities of the partners are often equal unless stated otherwise. Profits and losses are also typically shared equally among the partners unless specified otherwise. As a result, the business itself does not pay income tax. Instead, taxes pass through to the owners’ personal tax return. Typically, a partnership agreement will describe which partners have certain authorities and responsibilities. A well-drafted partnership agreement can help avoid misunderstandings by clearly defining each partner’s roles and expectations.
It’s worth noting that general partnerships in Delaware don’t require public filings, which offers more privacy.
What is a Limited Partnership?
A limited partnership is a type of business entity where one or more partners are not actively involved in the day-to-day management of the business. Leadership in these businesses is comprised of limited partners and general partners. All limited partners, sometimes referred to as “silent partners,” serve as investors in the business and are not involved in the day-to-day management of the company. Limited partnerships also have at least one general partner, who is responsible for overseeing the day-to-day operations of the business.
Both general partners and limited partners may invest money in the company, though limited partners' personal assets are typically not at risk if the business incurs debts or legal issues. A general partner may be personally liable for the debts of the company, while limited partners typically are not. This means that 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.
It is also 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's information public. One solution is to have an LLC serve as the General Partner, but you can also just list a person.
Limited partnerships are a highly popular choice for private equity firms, which purchase privately owned companies with the goal of increasing their value. 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. Remember, the benefit of being a limited partner vs a general partner is that your liability is limited, and you can’t lose more money than you invest.
General Partnership vs. Limited Partnership: Key Differences
These two types of partnerships share quite a few similarities, but they are still built for two different purposes. Understanding some of the distinctions between Delaware general partnerships and limited partnerships can help business owners evaluate which structure may better fit their goals.
Personal Liability
In a general partnership, each general partner can be personally liable for the partnership’s debts and obligations. This means a creditor may be able to pursue a partner’s personal assets.
In a limited partnership, liability depends on the partner’s role. A general partner typically has personal liability for the partnership’s obligations, similar to a partner in a general partnership. Limited partners, however, generally have liability limited to the amount they invested or agreed to contribute, though these rights and protections may vary from business to business.
Management Structure
In a general partnership, all partners typically share responsibility for managing the business. Unless the partnership agreement says otherwise, each general partner has the authority to make decisions and act on behalf of the partnership.
In a limited partnership, management is generally handled by one or more general partners. Limited partners are typically investors and do not have the same management authority as general partners, although their rights can vary depending on the partnership agreement and applicable state law.
Tax Treatment
Both general partnerships and limited partnerships are typically taxed as pass-through entities. This means that the partnership itself does not pay corporate income tax. Instead, profits and losses pass through to the individual partners, who report their share on their personal tax returns. Note that general partners are considered active participants in the business and are subject to self-employment taxes.
If you have any questions about your partnership’s tax obligations, please consult a tax professional.
Formation Requirements
A general partnership is typically easier to form than a limited partnership. In Delaware, general partnerships generally do not require a filing with the Delaware Secretary of State. While partners can choose to file with the state, it is not a prerequisite.
A Delaware limited partnership, however, requires a formal filing. One or more representatives from the business, including all general partners, must submit a Certificate of Limited Partnership with the Delaware Secretary of State.
Limited Liability Partnerships
While less popular than the other two types of partnerships, limited liability partnerships still have a place for some aspiring business owners. LLPs combine elements of a general partnership with liability protection more commonly found in corporations. In an LLP, all partners can take part in managing the business, but unlike a general partnership, LLPs can provide liability protection to all partners, with the extent of that protection varying depending on the business.
LLPs are especially popular among professional service firms like law offices, accounting firms, and medical practices, where each partner will be liable only for their own work.
Should I Form a General or Limited Partnership?
Choosing between a limited and a general partnership for your business typically depends on your risk tolerance and the roles each member wants to play. If you need equal control among partners, go with a general partnership. If you're bringing on silent investors or want to limit liability for some partners, a limited partnership is likely the better fit.
We recommend that our clients 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, you can always choose to form a Delaware LLC.
Get answers for all your business needs
Not sure what’s right for your company? Speak directly with our specialists and get clarity before you make your next move.
Talk to an expertFAQs
Can you convert a general partnership into a limited partnership?
A general partnership can be converted into a limited partnership, but the process depends on state law. In Delaware, before filing any paperwork, the conversion must be approved in accordance with the existing partnership agreement. Next, your team can file a Certificate of Conversion and a Certificate of Limited Partnership with the Delaware Division of Corporations.
Can someone be both a general partner and a limited partner?
In some rare cases, a person may be able to hold interests as both a general partner and a limited partner in the same limited partnership. While this may come with certain rights and powers, keep in mind that holding a limited partner interest does not protect you from the liabilities of being a general partner.
Can a partnership exist without a formal written agreement?
A Delaware general partnership does not require a written agreement. If you and a partner simply start running a business together and splitting the profits, Delaware law generally considers you a GP, even if you never wrote anything down. Meanwhile, a limited partnership cannot legally exist without filing a Certificate of Limited Partnership with the Delaware Secretary of State.
*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.
More By Devin Scott
![]()
Email this article to a friend
There are 6 comments left for General Partnership vs Limited Partnership
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.
1 | 2