Key Takeaways

  • An LLC general partner provides liability protection for the entity itself but not for individual partners acting as general partners.
  • LLCs can elect to be taxed as partnerships or corporations, offering flexibility in tax treatment.
  • General partners in a partnership retain unlimited liability, unlike LLC members who generally have liability protection.
  • An LLC general partner allows a business to combine liability protection with active management roles.
  • Choosing an LLC as a general partner requires careful attention to state laws, tax implications, and formation requirements.

A general partner LLC, one of the most common types of partnerships, is arranged by two partners that have sole ownership of and liability for the business. This means they control all aspects of the business and are held financially responsible for its obligations and debts. A general partnership limited liability corporation (LLC) can be formed in a variety of ways, including orally or in writing.  

Before you start the process of forming your general partner LLC, review the characteristics, advantages, disadvantages, and responsibilities associated with it.

Characteristics of a General Partnership

A general partnership LLC differs from the other types of partnerships in several ways. In a general partnership LLC:  

  • The owners are referred to as "partners".
  • In absence of a partnership agreement, state partnership law applies.
  • A partnership files a partnership tax return every year on Form 1065, but no tax is due; instead, each partner should file Schedule K-1, listing their share of the profits or losses for the year with their personal tax return.
  • All partners are fully engaged in the day-to-day activities of the business and share full liability.
  • Each partner has an equal right to manage the business enterprise as he or she sees fit, meaning any partner in a general partnership can act on behalf of the entire business without the other partners' knowledge or permission.
  • Each general partner usually gets a single vote in decisions regarding key partnerships, with no regard to the amount of their capital contribution on an individual basis.
  • Simple majorities normally determine the outcome of key business decisions.
  • General partners need to have the ability to counsel their co-owners about specific business policies or ideas in pursuit of unified agreement between co-owners.

These characteristics are particularly appealing to those who own businesses in the legal and medical fields because the sharing of office space, staff, and resources is frequently considered a partnership.

Additional Characteristics of an LLC General Partner

An LLC general partner differs from a traditional general partner by providing liability protection at the entity level. While the LLC itself shields its owners (members) from personal liability for the company’s debts, a general partner within a partnership remains personally liable for the debts and obligations of the partnership. When an LLC acts as the general partner in a partnership, the LLC assumes this liability rather than exposing individual members’ personal assets.

Other notable characteristics include:

  • Management flexibility: An LLC general partner can appoint managers to operate the partnership or allow all members to participate in management.
  • Creditor protection: Creditors of the partnership can generally only pursue the assets of the LLC acting as general partner, not the personal assets of its members.
  • Ownership structure: The LLC itself becomes a partner, creating a layer of separation between the partnership and individual investors.

This structure is often used in real estate partnerships, private equity funds, and similar ventures where liability protection for individual investors is a priority.

Responsibilities of the General Partners

General partners are responsible for managing the day-to-day operations of the business. This includes:

  • Acting on behalf of the business and the other partner(s), including making legally binding decisions.
  • Remaining loyal and honest with the other partner(s) and not performing or conducting any tasks, transactions, or deals that risk the partnership.
  • Controlling the partnership's finances and, as such, being held fully liable for the financial decisions, obligations, assets, and debts.
  • Developing business policies, protocols, and agreements, including gaining the support of the other partner(s) to proceed with business policies, contracts, and ideas.
  • Drafting and implementing a written operating agreement; although not required by law, a written agreement protects the partnership and the partners and outlines future activities.

For these responsibilities, general or active partners are given additional time to develop business plans for growth and development.

Tax Treatment of an LLC General Partner

The tax treatment of an LLC general partner depends on how the LLC elects to be taxed:

  • Default classification: By default, a multi-member LLC is taxed as a partnership under IRS rules. Profits and losses pass through to members, reported on their individual tax returns via Schedule K-1.
  • Self-employment tax exposure: Members of an LLC that serves as a general partner may be subject to self-employment taxes on their share of partnership income if they materially participate in the business.
  • Electing corporate tax treatment: The LLC general partner can elect to be taxed as a C corporation or an S corporation, changing its liability for self-employment taxes and potentially reducing overall tax burden depending on the situation.

Careful tax planning is recommended to determine the optimal classification for an LLC general partner based on participation, distributions, and income expectations.

Advantages of a General Partner LLC

A general partnership LLC offers many advantages that can help grow your business. These include:

  • Having complete control over how to form and run your business.
  • Not having to pay filing fees to establish a partnership.
  • Not being required to hold meetings, prepare meeting minutes, appoint officers, or issue shares of stock.
  • Receiving guaranteed payments, including profits interests — a percentage of the partnership's profits — without having to contribute money to the business.

Reasons to Use an LLC as a General Partner

Choosing an LLC as a general partner offers several strategic benefits:

  • Limiting personal liability: Using an LLC insulates individual members from the partnership’s liabilities; creditors can only pursue the LLC’s assets.
  • Preserving control: The LLC acts as the decision-making general partner, maintaining authority over partnership activities while still protecting member interests.
  • Attracting investors: Investors may be more comfortable contributing capital to a partnership where their exposure is limited by an LLC general partner structure.
  • Flexibility in management and taxation: The LLC can be structured to accommodate varying levels of participation and can elect different tax classifications.

This structure is especially attractive in high-risk industries or projects where partners want active control but seek to avoid personal liability.

Disadvantages of a General Partner LLC

General partnerships are not without their disadvantages. Because the partners are held financially liable for their partnerships' debts and obligations, all partners risk:

  • Being held personally liable for the general partnerships' debts and obligations to creditors, legal suits, and more.
  • Having legal proceedings against the partnership itself, including the partners' assets (i.e., house or car).
  • Having personal assets be subject to liquidation.
  • Being personally liable for the actions of all other partners.

To mitigate or lessen their personal liability, partners should buy insurance to cover potential financial obligations as well as liabilities for injuries and loss.

In addition to the financial risks, partners should be aware that a general partnership does not exist separate from its owners, meaning any partner's death, withdrawal, or inability to conduct business essentially ends the partnership.

Challenges of Using an LLC as a General Partner

Despite its benefits, using an LLC as a general partner has potential drawbacks:

  • Complex formation and compliance: Forming both an LLC and a partnership increases administrative tasks and state filings.
  • Increased costs: You’ll need to pay formation fees, annual reports, and possibly franchise taxes for the LLC and the partnership.
  • Potential double filing: In some states, you may need to file tax returns and pay fees for both the LLC and the partnership.
  • Limited case law guidance: The intersection of LLCs acting as general partners in partnerships is a relatively newer legal area, meaning fewer precedents to guide dispute resolution.

Business owners should weigh these disadvantages carefully against the benefits, especially for small partnerships with limited resources.

Forming a General Partnership

With proper planning, guidance, and an understanding of the advantages and disadvantages of a general partnership, business owners can form and maintain one and enjoy successful business growth and development.

Steps to Form a Partnership with an LLC General Partner

To form a partnership where an LLC serves as the general partner:

  1. Form the LLC: File articles of organization with the state, create an operating agreement, and obtain an EIN for the LLC.
  2. Create the partnership agreement: Draft a detailed agreement naming the LLC as the general partner and specifying management rights, profit-sharing, and responsibilities.
  3. Register the partnership: Some states require registration of limited partnerships or other partnership forms where a corporate or LLC general partner is used.
  4. Obtain licenses and permits: Depending on your industry and state, you may need additional licenses for both the LLC and the partnership.
  5. Open bank accounts: Establish separate accounts for the LLC and the partnership to maintain proper financial separation.

Consulting with a legal professional is highly recommended to ensure compliance with state laws and to draft enforceable agreements.

Frequently Asked Questions

  1. What is an LLC general partner?
    An LLC general partner is an LLC that acts as the general partner in a partnership, providing liability protection for individual members while assuming management responsibilities.
  2. Does an LLC general partner shield individual members from liability?
    Yes, generally only the LLC’s assets are at risk for partnership debts, protecting members’ personal assets from claims.
  3. How is an LLC general partner taxed?
    It depends on tax election: by default as a partnership, or it can elect corporate taxation. Members may be subject to self-employment tax if actively involved.
  4. Why choose an LLC as a general partner?
    To limit personal liability while retaining control over partnership decisions, making it appealing for investors and managers alike.
  5. What are the downsides of using an LLC as a general partner?
    Higher setup and maintenance costs, complex compliance requirements, and fewer legal precedents in disputes.

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