General Partner Liability: Everything You Need to Know
General partner liability means when you enter a general partnership, the personal liability you incur is unlimited.3 min read
General partner liability means when you enter a general partnership, the personal liability you incur is unlimited. Three types of partnerships exist: limited, general, and limited liability partnerships. Each kind of partnership assigns a different degree of liability and liability protection to owners.
Personal and Partnership Liability
Your personal liability and your partnership liability can vary when you enter a business partnership.
- The partnership liability you accept is based on the type of partnership you enter.
- It's also affected by the position you hold in your partnership.
- State laws also affect your partnership liability.
- Under partnership rules, all partners have the responsibility to pay off any debts the business incurs.
- This holds true even if only one partner was involved in something like entering a bad contract, or if one gets into an accident while on the job.
A lot of states hold partners severally liable. In these states, if the partner who entered into a bad contract isn't able to cover its cost but another partner is able to, the court judgment requires that the other partner pays for the bad contract. If you're in the position of being the other partner, the amount of the business that you own, or the percentage, won't have any effect on the judgment.
No Need to Set Up a General Partnership
While other forms of partnerships and business entities need to be set up or established, general partnerships don't have that requirement. No specific intent is required in order to form a general partnership. All that's required to prove a general partnership exists is being able to establish that two or more people are performing acts of business together.
The General Partner's Role in Limited Partnerships
The liability held by one or multiple partners is limited when in a limited partnership or LP. A minimum of one general partner and one limited partner is required when establishing an LP. The general partner in an LP is endowed with the full responsibility and power of managing the business, and he or she is assigned unlimited personal liability if something goes wrong. Limited partnership agreements resemble general partnership agreements in this matter.
The Limited Partner's Role in Limited Partnerships
The sole determinant of the limited partner's liability is calculated by the percentage of the investment he or she made in the partner show. The limited partner is also protected in regard to his or her involvement in managing the business. If, however, the limited partner becomes more involved in managing the business, then his or her liability in the partnership becomes equal to that of the general partner.
Limited Liability Partnership Protections
Partners in a limited liability partnership or LLP, have a bit more protection from errors made by one another. As an example, if one partner in an LLP gets sued by a client, the other partners in the LLP aren't personally liable for the judgment, in the event that there is a judgment. Just like in other partnership structures, the LLP owners are legally required to cover contracts signed by the partners.
The Importance of Choosing a Trustworthy Partner
This draws attention to the importance of going into business with trustworthy people. It also draws attention to the importance of preparing a detailed partnership agreement that clarifies the liabilities of each partner. An attorney who specializes in business can help you work your way through the personal liability details of the partnership agreement. Your attorney can also make sure you understand the positive and negative aspects of partnership in comparison to other types of business structures.
Partnerships are formed when two or more people make a decision and enter into an agreement to run a business together. The agreement can be oral or written. With a general partnership, the people need only have an intention to engage in business activities together in order to form it. Local and state filings aren't required to form a general partnership, though the partners do have to file the appropriate tax forms. Partnerships and corporations are not the same because corporations don't exist until documents called the articles of incorporation are filed with the appropriate secretary of state.
If you need help with general partner liability issues, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.