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.
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 and differences 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.
- 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.
- 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.
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