Two types of partnership businesses allow some or all co-owners to manage the business affairs, share in the profits and control the business assets. In general partnerships, all partners equally control business operations, whereas in limited partnerships, some partners may have no authority to manage the business operations or perform acts on behalf of the partnership.
General and Limited Partnerships
A general partnership exists when two or more individuals own a business for profit, equally managing the business and sharing the profits and liabilities. The partners may also create a partnership agreement to determine the authority of each partner and how the income and losses of the business affect each partner’s personal liability. A limited partnership must have at least one general partner with unlimited liability and one limited partner who contributes capital to the business but does not participate in the business's affairs. Limited partners have limited liability and are only personally liable for the partnership debts to the extent of their investment in the business.
The partnership agreement can stipulate whether the general partners share the same authority to make decisions for the business or whether some general partners have fewer or more rights than the other partners. The partnership agreement also includes the amount of initial capital contributions of each general partner and how the profits and losses are distributed based on each partner’s beginning and future capital contributions.
Limited Liability Status
Unlike general partners, limited partners do not have unlimited liability to the debts of the business. Limited partners also do not participate in management functions. Most limited partners only contribute capital to the business and receive profits to the extent of their capital contributions and according to the partnership agreement.
Limited Liability Partnership
General partners are liable for the business's third-party contracts. A limited liability partnership is less risky for co-owners who would otherwise have unlimited liability in a general partnership, as each partner in a limited liability partnership is personally liable for his own wrongful actions committed on behalf of the business. If one partner commits malpractice or negligence with third parties, the innocent partners are not personally liable for these claims in a limited liability partnership. However, the partners continue to be equally liable for the debts of the partnership.
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