Difference Between Limited Partnership and General Partnership

Limited Partnership vs General Partnership

A partnership is a form of business arrangement in which a particular business will be owned and operated by a number of people, known as partners of the business. In this article, we discuss general and limited partnerships. The two are different from each other based on how these partnerships are run, and how liable the partner will be for any debts or losses made by the firm. The following article attempts to show the readers the differences between these forms of partnership, through explaining the difference in their duties and the extent of their liability.

What is Limited Partnership?

Limited partners are those that invest in a business that is already in operation; thus, they are not able to exercise control over the business activities or participate in the making of important decisions. In the formation of a limited partnership, it is essential that the partners file the partnership as a business, and are able to meet other requirements in registering and starting up a limited partnership. Usually a limited partnership may include a director board that is responsible for decision making and in foreseeing business activities. An important point to note is that, in a limited partnership, the partners have limited liability. That means, in the event the business makes a loss, they are only liable to the extent of the investment made in the business; their own personal funds or assets cannot be used to recover the debts.

What is General Partnership?

In a general partnership, the partners usually responsible in setting up of the business from scratch, and are able to participate in decision making and the daily running of the business. It is possible for general partners to use a legal document in agreement of the formation of a partnership, but usually such partnerships are formed based on trust and understanding between the partners. A main disadvantage of forming such a partnership is that there is a lack of formality in procedures followed. In the event that a partner may turn against his colleges or if a partner leaves or dies, the partnership may have to be dissolved if proper procedure has not been legally agreed upon beforehand. The other main disadvantage is that partners are fully liable for any losses, and they may be responsible to the extent of their personal funds in the event the business makes losses.

What is the difference between Limited Partnership and General Partnership?

Both limited and general partnerships are forms of arrangements in which a number of individuals come together to form a business relationship, to carry out their business activities and obtain funds required for running the business. Both forms of partnerships may include general partners, as even a limited partnership might include a general partner, whereas general partnerships are only made up of general partners. Limited partners invest a business already in operation and do not take part in the setting up of the business like general partners. This gives a limited partner less control, whereas general partners participate in the daily business activities and decision making. In a general partnership, the partners are wholly responsible for any losses made, and even their personal funds and assets can be sold. In contrast to this, limited partners are not required to contribute their personal funds and their liability is limited to the extent of their investment in the business.