The Difference Between a Partnership and a Limited Partnership

Which is better for your business? A partnership or limited partnership?

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by Chris Hinson

A partnership (also referred to as a general partnership) is a business arrangement where two or more people (who are not husband and wife) are owners of a business. Unlike a corporation, you do not need to file any documents with the state to make your business a partnership. A partnership is created by default, unless the business is specifically formed as some other type of business entity, such as a corporation, a limited liability company, or a limited partnership.

A general partnership is one in which all of the partners have the ability to actively manage or control the business. This means that every owner has authority to make decisions about how the business is run as well as the authority to make legally binding decisions. Unless the partners have a partnership agreement, each partner will have equal authority.

Partners in a general partnership don't have any limit on their personal responsibility for the debts of the business. This means that the partner could lose more than just his investment in the business – personal assets would have to be used to pay business debts if necessary. Each partner in a general partnership is also "jointly and severably" liable for debts of the business. Joint and severable liability means is that each partner is equally liable for the debts of the business, but each is also totally liable. So if a creditor can't get what he is owed by one or more of the partners, he can collect it from another partner, even if that partner has already paid his share of the total debt. If someone sues your partnership and obtains a large judgment, and your partner doesn't have the money to pay his share of it, you will have to pay the entire amount.

A limited partnership is different from a general partnership in that it requires a partnership agreement. Some information about the business and the partners must be filed with the appropriate state agency (usually the secretary of state).

Additionally, a limited partnership has both limited and general partners. A limited partner is one who does not have total responsibility for the debts of the partnership. The most a limited partner can lose is his investment in the business. The trade off for this limited liability is a lack of management control: A limited partner does not have the authority to run the business. He is really more or less an investor in the business.

A limited partnership must have at least one general partner. The general partner or partners are responsible for running the business. They have control over the day-to-day management of the business and have the authority to make legally binding business decisions. The partnership agreement will specify exactly which partner or partners have certain responsibilities and which have certain authority. General partners are also subject to unlimited personal liability for the debts of the business. The general partners of a limited partnership are also jointly and severably liable for the debts of the business, just like partners in a general partnership. If you need a business type that limits the liability of all partners, LLC formation could be your best choice.

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