Limited Partnership Vs. General Partnership In A Nutshell

A limited partnership is characterized by one or more partners that are not involved in the day-to-day operations of the business. A general partnership is the more common type of partnership of the two. It refers to a scenario where all partners contribute to the day-to-day management of the business.

Scenario	Limited Partnership (LP)	General Partnership (GP)
Ownership Structure	Consists of at least one general partner and one or more limited partners.	Comprises two or more general partners, with equal responsibility and liability.
Management Roles	General partners have management authority and control over daily operations.	All partners share management responsibilities and decision-making equally.
Liability	Limited partners have limited liability, meaning their personal assets are generally protected from business debts and lawsuits.	General partners have unlimited personal liability, making their personal assets at risk in case of business debts or legal actions.
Investment Role	Limited partners primarily provide capital or investments to the partnership.	General partners actively participate in the management and operations of the business.
Decision-Making Authority	Limited partners typically have limited or no involvement in decision-making and business operations.	General partners have full authority and involvement in decision-making and business operations.
Capital Contributions	Limited partners contribute capital to the partnership but do not participate in day-to-day operations.	General partners contribute capital and actively engage in running the business.
Taxation	Limited partners enjoy pass-through taxation, meaning profits and losses are passed through to individual tax returns.	General partners are also subject to pass-through taxation on their share of partnership income.
Management Liability	General partners assume full personal liability for the actions and debts of the partnership.	All partners, as general partners, share full personal liability for the partnership’s obligations.
Duration of Partnership	Limited partnerships often have defined terms and may continue with changes in limited partner ownership.	General partnerships may continue indefinitely unless dissolved by mutual agreement or legal action.
Role in Decision Disputes	Limited partners usually have no voting power in management decisions, reducing their role in disputes.	General partners equally participate in decision disputes and resolution processes.
Expansion and Withdrawal of Partners	Limited partners can typically sell or transfer their ownership interest with the consent of general partners.	General partners require the agreement of all partners to admit or remove partners.
Role in Daily Operations	Limited partners are passive investors and generally do not participate in daily business operations.	General partners are actively involved in the day-to-day management and leadership of the business.
Profit and Loss Sharing	Limited partners share in the profits and losses of the partnership according to their capital contributions.	General partners share profits and losses equally unless otherwise specified in the partnership agreement.
Control Over Business Decisions	Limited partners have limited or no control over business decisions and rely on general partners for management.	General partners have full control over business decisions and management responsibilities.
Management Compensation	Limited partners typically do not receive compensation for their passive investment role.	General partners may receive compensation for their active involvement in the business.
Legal Requirements and Formalities	Limited partnerships often require more formal documentation and filing with the state to establish the partnership.	General partnerships are relatively easier to form and may require fewer legal formalities.
Role in Raising Capital	Limited partners play a crucial role in providing capital but have limited involvement in fundraising efforts.	General partners are actively involved in fundraising efforts and business operations.

Table of Contents

Understanding limited partnerships

Limited partnerships (LPs) are a type of business partnership with at least two partners.

Note that limited partnerships must have at least one general partner and one limited partner.

Limited partners are not involved in daily operations and each has limited liability according to their personal investment in the business itself.

They do not influence decision-making but increase their liability if they wish to exercise more control.

Some jurisdictions in the United States may oversee the formation of a limited partnership with individuals required to register the partnership with the relevant state authorities.

Understanding general partnerships

In a general partnership, two or more partners agree to share business assets, liabilities, and profits.

This means that in the event the business experiences financial issues, the personal assets of every partner may be called upon to satisfy a debt or some other obligation.

Since every partner in a general partnership contributes to running the business, they also have equal input when decisions are made.

General partnerships are defined by three core characteristics:

As mentioned prior, the partnership must contain at least two partners.
All partners must agree to absorb any liability that occurs during the partnership, and
The terms of the partnership itself should be set out in a formal agreement.

Formal agreements are particularly important in general partnerships containing many partners.

The more partners there are involved in decision-making and management, the greater the potential for conflict.

In theory, an agreement should clarify who is responsible for what outcomes and detail how much control or influence each partner retains.

Key similarities between each type of partnership

Partner contributions

Both types of partnership require the individual partners to contribute to the business, whether that be capital, expertise, labor, or property.

Pass-through entities

Both are also considered pass-through entities.

This means the partners do not lodge business tax returns but instead report profits and losses as part of their personal income tax returns.

Key differences between each type of partnership

Management

In a general partnership, there is a tendency for labor and assets to be divided equally among each partner.

Limited partnerships are characterized by one person exercising decision-making and operational control over the other partner(s).

Ease of registration and cost

General partnerships are unincorporated businesses and are thus not required to be registered.

They are the default partnership that results when one individual enters into business with one or more others.

While there are fewer barriers to entry than in a limited partnership, it is still recommended that the business employs a specialized attorney to draft a partnership agreement.

Conversely, limited partnerships in the United States require a certificate to be filed with the relevant state’s secretarial office.

Key takeaways

A limited partnership is characterized by one or more partners that are not involved in the day-to-day operations of the business. In a general partnership, however, all partners contribute to these operations.
Limited partnerships must have at least one general partner and one limited partner, with each possessing liabilities according to the size of their personal investment in the business. In a general partnership, each partner bears profits, losses, liabilities, and decision-making power equally.
Both types of partnership are pass-through entities and require each partner to contribute their capital, labor, expertise, or property. However, the two approaches differ in their division of labor and assets. What’s more, general partnerships are easier and more cost-effective to establish.

Key Highlights:

Limited Partnership (LP) vs. General Partnership:
- Limited partnerships involve partners not involved in daily operations, while general partnerships have all partners actively managing the business.
Structure of Limited Partnerships:
- LPs require at least one general partner and one limited partner.
- Limited partners have limited liability tied to their investment and can increase liability if they seek more control.
- Registration may be required in some U.S. jurisdictions.
Structure of General Partnerships:
- General partnerships involve two or more partners who share assets, liabilities, and profits.
- All partners have equal decision-making power and share liabilities.
Key Characteristics of General Partnerships:
- Minimum of two partners.
- All partners are jointly liable for business obligations.
- Formal partnership agreements are advisable, especially with many partners.
Similarities Between Both Types of Partnerships:
- Partner contributions, including capital, expertise, labor, or property.
- Both are considered pass-through entities for tax purposes.
Differences Between Both Types of Partnerships:
- Management: General partnerships divide labor and assets equally among partners, while limited partnerships have one partner with decision-making control.
- Ease of Registration and Cost: General partnerships are typically unincorporated and may not require formal registration, whereas limited partnerships often require state registration.
Key Takeaways:
- Limited partnerships have passive limited partners and active general partners, while general partnerships involve all partners in daily operations.
- Both types require partner contributions and are pass-through entities, but they differ in management and registration requirements.
- Formal partnership agreements are recommended, especially in general partnerships with multiple partners.