Key takeaways
- General and limited partnerships both involve two or more partners who form a business together.
- General partnerships are easy to set up, but each partner can be personally liable for the actions of the other partners.
- Limited partnerships can reduce personal liability for limited partners, who typically are not involved in the business’s day-to-day operations.
If you’re interested in pursuing a business partnership, there are a few partnerships structures to consider. How involved each partner wants to be will help determine which business entity to choose, as will the level of liability you are comfortable with and the cost to form the partnership.
What is a general partnership?
A general partnership is when two or more individuals come together and agree to share assets, profits and liabilities of a business.
In a general partnership, the partners agree to unlimited liability. This means that if the business has legal or financial issues, all partners’ personal assets are equally on the line to make good on the business’s debts or obligations.
Additionally, all partners typically manage the day-to-day operations of the business. Each partner is a decision-maker who has equal say in the business.
To be considered a general partnership, the business must meet the following standards:
- Have at least two people in the partnership.
- All partners have agreed to take on any liability that may incur through their partnership.
- Ideally, the general partnership should be solidified in a formal partnership agreement.
When creating a general partnership, think carefully about how many partners you want involved in running the business. The more partners there are, the more potential conflicts can arise when making decisions.
What is a limited partnership?
A limited partnership (LP) is a type of business partnership that requires two or more partners. Unlike general partners, where all partners play an equal role in running the business, limited partners do not take part in day-to-day operations.
Limited partners have liability limited to the amount of money they invested in the business. The general partner of the business has unlimited liability. Limited partners don’t have control over business decisions and if they begin to exercise control, they may lose their limited liability protections.To be considered a limited partnership, the business must have:
- At least one general partner.
- At least one limited partner.
It’s worth noting that many U.S. states govern the formation of limited partnerships, so partners may need to register their partnership with their state’s secretary of state. Contact your local secretary of state’s office for details. A business attorney can also help with this process if need be.
General partnerships vs. limited partnerships: At a glance
| General Partnerships | Limited Partnerships | |
|---|---|---|
| Ownership | Two or more people. | Two or more people. |
| Liability | Unlimited personal liability for all partners. | One owner has unlimited personal liability while other partners have limited liability. |
| Taxes | Pass through. | Pass through. |
| Set up | Typically no paperwork needed. | File a certificate of limited partnership. |
| Management | Equal division of labor and assets. | General partner oversees business, while limited partner is not involved in day-to-day operations. |
Key differences between general partnerships vs. limited partnerships
Here’s how these partnerships differ so you can choose which is best for your business.
Management
For general partnerships, there is more of an equal division of labor and assets. You can divide up labor and job responsibilities as you see fit, but all partners are usually involved in running of the business.
In a limited partnership, a general partner runs the business. Limited partners generally do not take part in day-to-day operations and do not have the same decision-making authority as the general partner.
Liability
Unless otherwise stated in the partnership agreement, general partners all equally share in the profits, losses and liabilities of the company. Their personal assets are equally liable for the business’s debts and obligations.
In contrast, in a limited partnership, the general partner is fully liable, but limited partners are only liable up to the amount they invest in the business.
Setup
A general partnership is an unincorporated business and does not need to be registered with the state in which it operates. If you go into business with one or two partners, you are automatically a general partnership. As such, setup is easy and free. That said, we recommend drafting a partnership agreement, and you may decide to use a business attorney or online legal service to help with this step.
Limited partnerships, while much simpler than a corporation or LLC, require additional steps to set up compared to a general partnership. Typically, you’ll need to file a certificate of limited partnership with your state’s secretary of state office. This form will also require you to have a registered agent.
Similarities between general partnerships and limited partnerships
Even with their differences, general and limited partnerships share a few core features:
- More than one owner: Both structures include at least two partners.
- Partner contributions: Each partner contributes value to the business, such as property, financing, industry expertise or labor.
- Shared profits and losses: Partners share in the company’s profits and losses.
- Pass-through taxation: The partnership generally does not pay separate federal income taxes. Instead, profits and losses pass through to the partners, who report them on their personal tax returns.
What is a partnership agreement?
A partnership agreement is a legal document that covers how the partners intend to:
- Share profits.
- Cover losses.
- Solve problems.
- Close the business.
Make sure you pick a partner who you feel comfortable working with, who you communicate well with and who prioritizes the business’s best interests.
You will be responsible for the outcomes of partners' actions, which is why a written partnership agreement is important. Establishing official limits for how your partners can exercise their control in the business will help keep everyone aligned.
A version of this article originally appeared on JustBusiness, a subsidiary of NerdWallet.
