General Partnership vs Limited Partnership

general partnership vs limited partnership

When it comes to the two common types of partnerships that often get confused – general partnerships vs limited partnerships – there are some key differences that will impact how each partner participates in the company. 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. This blog on the differences between General Partnerships and Limited Partnerships can help.

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. Each partner will have a partnership account on the books of the company. 

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. All limited partners, sometimes known as “silent partners,” will serve solely as an investor in the business, with the funds that they contribute being the extent of their liability. However, the limited partners do not have decision-making power in the company, withdrawing funds, etc.

Limited partnerships will 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 contributing funds to purchase the real estate, as long as there is at least one general partner. The benefit of being a limited partner vs a general partner is that your liability is limited, while the downside is that a limited partner will not have the decision-making powers that a general partner has.

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 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.

It is 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 public information. The General Partner is often an LLC, but there are times when we have seen clients choose to list a person as the General Partner.     

We recommend clients will work with an attorney to ensure they understand their liability and protections in any partnership, including General Partnerships and Limited Partnerships. For clients who wish for all members to have limited liability protection, the popular choice is the 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, 2017

I 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, 2017

Here 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:

  1. 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.
  2. 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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