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General Partner vs. Limited Partner: Pros and Cons to Consider

General Partner vs Limited Partner

If you wish to enter into a partnership with an individual or company, you need to know what, exactly, the risks, duties, or roles will be. Two common partnerships often confuse business owners and need to be defined. 

If you need to discuss forming a partnership in detail, I can assist you. I can elaborate on the advantages or drawbacks of each of the two entities. After you read the following information, contact me at sam@mollaeilaw.com. I can give you additional insight, and provide you with more details about general partner vs. limited partner relationships.

The following information will detail the differences between a general partner vs. limited partner formation.

 

What Is a General Partnership?

A general partnership is considered the most common partnership entity. In this relationship, each partner contributes in the daily business operations. Each partner has the authority to decide on business transactions and take part in contractual agreements.

The contributions, liabilities, and obligations of the partners are considered equal unless noted otherwise. To make any distinction, a partnership agreement should be created, which describes each partner’s obligations and authorities.

 

What Is a Limited Partnership?

A limited partnership is a business relationship where one or more partners do not have the authority to manage daily business operations. Frequently, a limited partner is called a silent partner.

The silent partner contributes financially to the business as an investor. Therefore, the funds he or she provides represent the extent of his or her liability. That is the key difference between a general partner vs. limited partner setup. While a general partner’s liabilities (personal and business) are tied up in the business, the limited partner’s liability is limited to his or her investment. 

A limited partnership still has one general partner to oversee the daily operations of a business or practice. A general partner may invest funds into the operation. As noted, he or she may also be liable personally for the company’s obligations. A limited partner does not have to worry about this risk.

Only the general partner’s personal and business assets are at risk if the company needs to pay off certain debts.

Many times, a general partner vs. limited partner formation favors a limited formation for purchasing real estate. For example, several limited partners may raise the funds needed to purchase a property, as long as one general partner runs the operations.

The benefit of being a general partner vs. a limited partner is the ability to make business decisions. A limited partner benefits because he or she reduces his or her personal liability. 

Limited partnerships are usually chosen as a company formation for private equity firms. Private equity firms buy privately-owned companies with the goal of increasing their worth. 

An example of a private equity firm and limited partnership is Roark Capital Group. This limited partnership has invested in well-known companies, such as Sonic, Meineke, and Arby’s.

 

How Do You Define a Partnership?

Legally, a partnership is a formed entity where at least two or more individuals operate a business. Two basic partnerships exist – general partner vs. limited partner, with a limited partner formation also known as a limited liability partnership.

No filing fees need to be made when establishing a partnership. 

Partnerships Do Not Have to Assume the Following Responsibilities

Partnerships are not required to hold annual meetings, nor do the following:

  • Prepare meeting minutes
  • Appoint company officers
  • Issues shares of stock

However, creditors can bring lawsuits against the partners to secure a debt, and often go after the assets of partners, or their autos or home. That is why limited partners limit their interest to investing in the business.

 

What Is Included in the Terms for a Partnership?

General partner vs. limited partner formations rely on establishing an agreement about the terms in which the entity operates. Typically, general partners share in a business’s profits and losses equally, unless an agreement states otherwise. 

Additional partnership terms provide clauses about how partnership shares should be divided should a partner leave the company. 

A state’s partnership law is applied when general partners do not clarify the terms of their relationship in a partnership agreement. All rules for the partnership, including general partner vs. limited partner obligations, should be stated in the agreement.

 

Do You Have to Establish a Partnership Agreement?

Legally, you do not have to draft a partnership agreement. However, you definitely need to do so to stay out of legal trouble.

If you neglect to draft a written contract, you risk potential future legal troubles. Without an agreement in force, you must follow the default rules for partnerships established in your state. 

Creating a partnership agreement will help you and your partner or partners define all aspects of your company’s operations, including the recordkeeping. and the issues that arise as your business grows.

The agreement does not need to be complicated or long. I can help you draft an agreement that is easy to understand and amend. Learn more about creating the contract by emailing me at sam@mollaeilaw.com

 

What Are the Differences between a Partnership and Limited Liability Corporation?

Forming a partnership is more straightforward, even if there is a difference between a general partner vs. limited partner relationship. A limited liability company, or LLC, requires the filing of state required paperwork while a partnership does not.

A partnership does not necessitate any required documentation be established, outside of a written agreement between the parties. 

The general partner is personally liable for all business debts while limited partners in an LLC cannot be held liable personally for business defaults or judgments.

 

What Are the Similarities of a Partnership and LLC?

Both of the entities provide for pass-through taxation, which means the owners can report their business income and losses on their individual returns. 

A partnership or LLC is not required to pay taxes.

 

What Are the Biggest Financial Risks in a General Partner vs. Limited Partner Relationships?

A general partner’s biggest risk is the loss of his or her personal assets should the company default while a limited partner’s largest financial risk is the loss of his or her investment.

The Main Benefits of Being a General Partner

You will find that there are benefits and disadvantages in each case. The main benefits of being a general partner are the following:

  • You have total control over business decisions while a limited partner has no authority in this area.
  • Your input in the business is to grow it and expand it, or manage it so it becomes a valuable enterprise.

The Main Advantages of Being a Limited Partner

The primary benefit of being a silent partner or limited partner is your financial investment. This investment can assist you in the following ways:

  • It can help you increase your financial portfolio and holdings.
  • It can assist keep you from getting into trouble with creditors, thereby securing your financial reputation in the business community.

The Primary Drawback of Being a General Partner

The primary drawback of being a general partner is that you can lose your home or personal assets in case of a business default. Therefore, you are under a great deal of pressure to ensure your business succeeds.

The Main Disadvantage of Being a Limited Partner

The main disadvantage of being a limited partner is your inability to manage the company. While the investments you make may speak volumes when it comes to growing the business, you still do not have a say when it comes to running the operations. I can help you make distinctions between a general partner vs limited partner formation. Contact me at sam@mollaeilaw.com to schedule a consultation today.

 

What To Do Next

You probably have several questions about partnerships after reading the above content. If so, I can answer your questions or concerns.

If you want to establish your business in a way that is simple to understand and operate, I can provide you with the legal assistance you need. If you and one or more people have decided to form a company, you may be interested in establishing a partnership. 

Whether you choose a general partner vs. limited partner standing is up to you. Again, I can help you make the distinction between the two. Contact me now at sam@mollaeilaw.com. I can answer your questions and guide you in the right direction.

Sam Mollaei, Esq.

As a Business Lawyer for Entrepreneurs, I help entrepreneurs start their U.S. business without dealing with complicated government forms. I’ve assisted more than 2,246 entrepreneurs successfully start their business and I'm backed by more than 702 5-Star Google Reviews. If you're interested in starting your business, take the first step by requesting your Free Strategy Session on this page.

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