What do you call the partnership where there are two or more general partners?

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 Delaware General Partnerships and Limited Partnerships can help.

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 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. In a general partnership, each partner will have a partnership account on the books of the company.

What is a Limited Partnership?

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 -- vs a general 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 Delaware General Partnerships and Delaware Limited Partnerships. For clients who wish for all members to have limited liability protection, the popular choice is the 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.

Two of the most common types of partnerships are general partnerships and limited partnerships. Though they are often conflated, there are key differences to note that will substantially affect how partners participate in running the company, how they benefit from the profits, and how they are  accountable for its losses.

What is a general partnership (GP)?

A general partnership is a business entity made up of two or more general partners who are responsible for the business. General partnerships are formed via an agreement—either verbal or written—made between two or more partners who all agree to share in the company’s profits, losses, and assets. General partnerships are:

• The default business structure for partners. Just like sole proprietorship is the default business structure for individual business owners, a general partnership is the default for multi-owner businesses. 
• Pass-through entities. Partners in a general partnership pay taxes on profits at the personal level. Compare this with corporations, in which profits are doubly taxed—first at the corporate level and then at the owners’ personal level. 
• Usually equal. Partners in a general partnership take on equal personal responsibility for the business. That means equal shares of profits and equal liability for debts or legal action. Partners can adjust the split of both profits and liabilities in their partnership agreement, but an equal split is the default.
• Not liability shields. Partners in a general partnership take on personal responsibility for the business and cannot shield their personal assets from legal claims or debts incurred by the business. 

What is a limited partnership (LP)?

A limited partnership is a business structure similar to a general partnership. However they have the addition of limited partners who invest in the business but who, unlike a general partner, are not involved in the day-to-day operations of the business.

How are limited partnerships used?

Limited partnerships are particularly applicable to businesses that have high startup costs or ventures that typically require investment from multiple parties. 

• Real estate. Limited partnerships are often used in real estate. In such a venture, there may be several limited partners who provide funds to purchase a piece of property. The general partner(s) may direct daily maintenance of the property, oversee rental tenancies, etc., whereas the limited partners likely will only benefit from a portion of the rental income or ultimate resale of the property.
• Private equity. Limited partnerships are also used in private equity. Private equity firms purchase portfolios of privately owned companies, work to increase their value, and then (hopefully) sell their ownership for a profit. Limited partners in a private equity context might offer seed funding for portfolio purchases, while general partners will engage in the day-to-day running of the firm and the nitty-gritty of growing the value of portfolio companies.
• Small business. The limited partnership business structure is relevant and applicable to small businesses, particularly those that have high overhead costs, such as a retail venture. Limited partners may offer investments to purchase inventory and rent a storefront, while a general partner might be in-store day-to-day to oversee operations and make sales.

General partnerships vs. limited partnerships: Similarities and differences

While general partnerships and limited partnerships share a number of core similarities—namely, the fact that they are partnerships—they are distinct in just as many important ways, particularly when it comes to liability protection and partners’ roles.

Establishment

Ownership and management

Profit, liability, and loss sharing

Tax benefits

Other types of business entities for partners

Although general and limited partnerships are the more common choices, there are other partnership structures available to business owners as well.

Limited liability partnerships

A limited liability partnership, or LLP, is a type of business entity that affords partners personal liability protection. Partners in an LLP do not assume liability for wrongdoing or errors made by other partners. This makes the LLP structure popular with (and typically limited to) law firms, doctors, accountants, and other professionals who are licensed and can face malpractice lawsuits. Unlike limited partnerships, partners in LLPs can have oversight of day-to-day firm affairs while maintaining their liability shield. 

Joint venture partnerships

A joint venture partnership is a partnership temporarily formed by two or more parties who agree to pool resources for the purpose of accomplishing a specific objective. For example, if you own a coffee shop and the retail space next door becomes available, but you can’t afford the rent on your own, you might form a joint venture partnership with a bakery or bookshop to acquire the space. 

While each of the partners is responsible for profits, losses, and costs associated with pursuing the objective, the joint venture partnership is its own legal entity. Joint venture partnerships aren’t a business entity unto themselves, but a way of forming one. Joint venture partnerships can form corporations, traditional partnerships, or limited liability companies—and the tax treatment and liability limitation of the joint venture partnership will vary depending on the form it takes. If a joint venture coffee shop/bookstore forms as an LLC, for example, and a customer injures themselves on the premises, the joint venture LLC would assume liability and shield ownership from any legal payouts. Parties in a joint venture partnership can be two or more individuals, companies, or even other partnerships.

Final thoughts

When considering how to structure a limited partnership, here are some questions for you and your business partners to work through via research and potential consultation with an attorney:

• How many partners are you planning to include?
• Will the partners all be involved in daily operations, or will some partners be investors only? 
• Are general partners willing to be personally liable for the business? And the potential wrongdoings of each other? 
• What are the specific requirements for forming a limited partnership in your state?
• What professional licenses, if any, will you need to operate your limited partnership?

• Email
• Pinterest
• Facebook
• Twitter
• LinkedIn

Topics:

How to Grow Your Business

Join 446,005 entrepreneurs who already have a head start.

Get free online marketing tips and resources delivered directly to your inbox.

Email addressSubscribe

No charge. Unsubscribe anytime.

Thanks for subscribing.

You’ll start receiving free tips and resources soon. In the meantime, start building your store with a free 3-day trial of Shopify.

When there is one or more general partners?

What are the 2 types of partnerships?

What is a general partner in a partnership?

Can there be 2 general partners?