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.
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.
Why Form a General Partnership?
- Simple set-up process
- Equal control and flexibility
- Pass-through taxation for all members
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,” will serve solely as investors in the business, with the funds they contribute being the extent of their liability. However, the limited partners do not have decision-making power in the company. Limited partnerships will 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 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 a limited partner is 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. However, limited partners can lose liability protection if they actively manage the business.
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.
Why Form a Limited Partnership?
- Liability protection for limited partners
- Clear separation of roles
- Attracts passive investors
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, each partner is shielded from personal liability for the business’s debts or the misconduct of other partners.
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 misconduct or negligence.
Why Form a Limited Liability Partnership?
- Shared management with liability protection
- Ideal for professionals
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.
*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
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.
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