KEY TAKEAWAYS 

  • A partnership is a business relationship in which two or more parties share the income and losses. 

  • A general partner is liable for the partnership's debts and obligations.

  • A limited partner is only liable for their investment.

A business partnership is a relationship where two or more parties share a business's profits, losses, and legal duties. For this type of business relationship, a  formal agreement is not required for a business partnership, however, it is advisable to draft one. Even without a formal agreement, partners should know the difference between a general partner and a limited partner.

What is a General Partner?

A general partner (GP) enjoys the primary responsibility of the partnership. They are responsible for managing and operating the partnership. Since the general partner has such a key role, they have unlimited liability for the partnership’s debts and obligations. You usually assume a broad role in these capacities within partnerships, such as:

Manager 

In this capacity, GPs oversee the company's day-to-day operations and help it achieve its goals by managing its resources. 

Fiduciary 

As fiduciaries, GPs have the obligation to act in the best interest of the company and its limited partners. This role also entails the duty of care and the duty of loyalty.

Compliance Office

As a compliance officer, GPs must ensure that the company meets all of its legal and regulatory obligations.

Investor Relations Specialist 

As investor relations specialists, GPs are in charge of communicating with investors and stakeholders. They often prepare earnings reports and assist with the annual report.

What is a Limited Partner?

A limited partner holds distinct responsibilities compared to a general partner. A limited partner invests money in the partnership. They do not run it. As the name implies, this partnership role also has limited liability. Limited partners' liability is usually capped at their investment in the partnership. A limited partner most often occupies one of the following roles:

Individual Investor

In this capacity, high net worth individuals  contribute money to operate the business

Institutional Investor 

Institutional investors are organizations that invest capital into a business for a specified period of time. 

Family investment partnership

This type of limited partnership is created to establish and invest family wealth.

Key Differences Between General and Limited Partners

While both general and limited partners play a role in the business operation, there is a sharp distinction between each member of the partnership. Let’s review some of the differences below;

Key Differences 

General Partner

Limited Partner

Liability

Unlimited liability.

Limited liability.

Management

Involved in the day-to-day decision making of the business. 

Not involved in the day-to-day operation of the business.

Investment Risk

GPs have high investment risk and have unlimited personal liability for the debts and obligations of the partnership.

LP investment risks are low. It is limited to their investment in the partnership.

Advantages and Disadvantages

If you are forming a partnership, choosing a role has benefits and slight drawbacks. Let’s take a look at the advantages and disadvantages of each.

General Partner

Being a general partner comes with a lot of responsibility; but it also offers an amazing opportunity to influence the success of the business. Since the general partner is tasked with overseeing business operations, you have the opportunity to implement a strategic plan and really make a mark on the business. However, this comes with the weight of being personally responsible for the debts and obligations of the business.

Limited Partner

Limited partners on the hand, get to enjoy a much more passive role in the operation of the business. As a limited partner, you must contribute capital. Then, leave the rest to the general partner. This role has many benefits. But, it has major drawbacks too. One is that you are not involved in the business's decision-making. If there is a business model you want to put in place, you can't. You are limited to making capital contributions..

 Legal Considerations

Understanding the legal implications of both general and limited partners is key to partnership success. General partners run the legal risk of mismanagement, negligence, or legal disputes involving the partnership. As a general partner, you must avoid actions that could lead to legal claims against the partnership or themselves.

Being a limited partner also carries a certain level of risk. As a limited partner you have to avoid engaging in actions that could be deemed as management and operations. Basically, you should never do the general partner’s job.  

For a partnership to be successful and maintain its partnership obligations, a well-drafted partnership agreement is necessary for its success. A partnership agreement outlines the rights, responsibilities, and expectations of each partner. It also ensures that each partner is legally compliant. If you are looking for a sample partnership agreement, you can find one here.

Real-World Examples

Real-world examples show how partnership agreements can drive success. Many prominent companies have leveraged strategic partnerships to enhance their business operations. Let’s take a look at a few:

  • BMW & Louis Vuitton

  • Go Pro & Red Bull

  • Gucci Timberland

  • Spotify & Uber

One of the most famous partnerships were not between companies but between a few individuals seeking success. This was the January 1975 partnership between Bill Gates and Paul Allen to form Microsoft. Through their innovation and business savvy, the partnership flourished from a business worth a few thousand dollars to a multi-billion dollar success. 

Conclusion

Forming a business partnership could be the next step in your business success. However, before you hop in, you should be aware of your rights, role and responsibility, as well as the expectation and limitations that are assigned. Being versed in the distinction between limited and general partner can help to ensure that you protect yourself both legally and financially.

FAQs

What is the difference between a managing partner and a limited partner?

A managing partner is involved in the day-to-day operation of the business and a limited partner on the other hand role is limited to capital contribution.

Is the general partner higher than a partner?

A general partner is not necessarily higher than a partner; however, they have different roles and responsibilities.