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Navigating the many business structures available can be overwhelming for new entrepreneurs or those involved in business at any level.
In terms of partnerships, both general and limited partnerships offer unique advantages and disadvantages that are important to know.
In this article, we’ll discuss which option might serve you best in your business endeavors.
This includes defining both partnership types, talking about their differences, and providing you with a simple and direct overview of their pros and cons.
Once you have finished reading this article, you’ll be fully informed of the differences between a general partnership vs limited partnership.
- A general partnership is a business structure where two (or more) people operate a business according to a Partnership Deed.
- To be a limited partner, you must be a passive investor who does not manage the business apart from providing capital.
- There are a couple of differences between general and limited partnerships, such as with involvement, liability, and more.
- Your choice between general and limited partnership may come down to how involved you intend to be with the business, and how much you’re willing to invest.
- Choosing between a general partner and a limited partner depends on the level of investment and involvement that you’re willing to allocate to the business.
General Partnership (GP)
A general partnership is a business structure where two (or more) people operate a business according to a partnership deed.
Partnership deeds describe the terms and conditions of a business venture that must be adhered to by each partner.
These documents usually include the names of each partner, the contributions of all parties involved in the agreement, profit and loss distribution, and more.
In a general partnership, every partner is legally bound to the business and is responsible for the debts and liabilities of the organization.
General partnerships are usually easy to form and offer a flexible structure, similar to that seen in a limited liability company.
Limited Partnership (LP)
Limited partnerships are very similar to general partnerships except for differences in partnership status.
In a limited partnership, one partner has to be a general partner while the other has to be a limited partner.
To be a limited partner, you must be a passive investor who does not manage the business apart from providing capital.
Limited partnerships require a certificate of limited partnership, which is issued by state governments.
Interestingly, this business structure is appealing to investors because they are able to invest money without being involved in the day-to-day administration.
What are the differences between a general partnership and limited partnership?
There are a couple of differences between general and limited partnerships, such as with involvement, liability, and more.
Take a look at the chart below for a more detailed description of each partnership type:
|General partners are involved in the management and administration of the business
|Limited partners are as involved as their financial contribution allows them to be
|General partners automatically assume all of the liability associated with the business and make the majority of decisions
|Limited partners do not manage the business on a daily basis
|Limited partners have as much liability as their investment amount
Advantages & Disadvantages
Now, let’s explore the advantages and disadvantages of both partnership types.
Your choice between general and limited partnership may come down to how involved you intend to be with the business, and how much you’re willing to invest.
Liability based on involvement
How to choose between a general partner and limited partner
Choosing between a general partner and limited partner depends on the level of investment and involvement that you’re willing to allocate to the business.
Do you want to be involved in the intricate decision-making process, or are you more interested in watching from afar?
Do you prefer to engage with the business based on your level of investment rather than obligation?
Once you have decided which role you’d like to take on, have a discussion with your partner or partners to come up with a configuration that benefits all parties.
Once decisions have been made, you can move on to signing a partnership deed.
General Partnership vs Limited Partnership: Which is the better option?
You’ve finished reading this article that provided a simple breakdown of the difference between general and limited partnerships – nice work!
Both partnership options offer a simpler business structure with investing prowess and flexible management.
Choose a general partnership if you want full control over the business, and go with a limited partnership if you want to invest and rest.
However, it is important to consult with a business professional before assuming any role in your company.
In the future, we hope that you feel more equipped to explore different business structures.