General Partnership vs. Limited Partnership: What’s the Difference?

Starting a small business with a friend or partner can be an exciting opportunity, but it also comes with its share of risks and responsibilities. One way to mitigate these risks is to choose the right type of partnership for your business. Two common types of partnerships are general partnerships (GPs) and limited partnerships (LPs). While they are often confused, there are significant differences between the two that can affect how partners participate in the business, how they benefit from profits, and how they are held accountable for losses.

What is a general partnership (GP)?

General partnerships (GPs) involve two or more partners who work together to run a business as co-owners. All partners in a GP are involved in managing the business and share in the profits and losses equally. GPs are pass-through entities, meaning that partners pay taxes on profits at the personal level rather than the corporate level. Additionally, all partners in a GP are personally liable for the debts and obligations of the business, meaning their personal assets, such as homes and investments, may be at risk if the business is sued or unable to pay its debts.

What is a limited partnership (LP)?

Limited partnerships (LPs) are similar to GPs, but they also have one or more limited partners who do not participate in the day-to-day management of the business and are not personally liable for its debts and obligations. Limited partners only contribute capital to the business and share in the profits, but are not held responsible for the losses. LPs are often used in businesses with high startup costs or ventures that require investment from multiple parties, such as real estate, private equity, and small businesses.

Forming a partnership agreement is crucial for both GPs and LPs, as it helps to clarify the roles and responsibilities of each partner, how profits and losses will be distributed, and what happens if a partner leaves the business or passes away. It also helps to protect the personal assets of the partners by establishing the partnership as a separate legal entity.

In summary, choosing the right type of partnership is an important decision for any small business, and it is essential to understand the differences between GPs and LPs. A partnership agreement is also necessary to ensure the smooth operation of the business and protect the personal assets of the partners.

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