When two or more people go into business together, they are partners. There are two main types of partnership: general and limited. Here’s what you need to know about each to make an informed decision about which is right for you.
What Is a General Partner?
Whenever two or more people start a business, they are general partners by default. General partners have a say in the day-to-day running of the business and any major decisions along the way. General partners also share equally in their liability if something goes wrong.
Typically, general partners have a keen interest in the daily details of running the business. This is often the case for entrepreneurs and inventors who want to bring a product to market. Likewise, professionals like doctors or architects may prefer to be general partners. This lets them control their relationships with clients while pooling resources for office space and equipment. General partners need to maintain strong communication and work together to solve problems. They must also reach an agreement about how they share profits among the other partners.
When it comes to liability, general partners must accept unlimited personal liability for the business. If the business loses money — through debt, poor investments, or legal issues — the general partners are on the hook for it. Their personal assets are at risk to cover their responsibilities, so there’s a lot on the line.
The Bottom Line: General partners own the business. They also have the authority to make important decisions. With that power comes great responsibility, as they are also personally liable for all losses.
What Is a Limited Partner?
A limited partner, or LP, is a business arrangement where partners aren't as involved in the business. Their role is limited in both the power to make decisions and their liability.
Limited partners are often investors who want returns on that investment. A limited partnership means that the investor is not involved in the regular decision-making of the business. That is left to the general partner or partner to control.
As for liability, a limited partner is only liable to cover losses up to the amount of their original investment. In this way, their personal assets are protected if the business fails or is sued. This level of protection is appealing to people who just want to invest without worrying about deep losses. For this reason, limited partnerships are popular with real estate investors.
The Bottom Line: Limited partners have an ownership stake, but aren't involved in decision-making. They are also not liable for losses beyond their initial investment.
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