Partnership Business Liability: Everything You Need to Know
Partnership business liability is one of the main considerations for entrepreneurs who wish to start a partnership.3 min read
Partnership business liability is one of the main considerations for entrepreneurs who wish to start a partnership. While it offers certain tax advantages, a partnership exposes its owners to liability for its debts and other financial obligations, putting their personal assets at risk. Depending on which type of partnership you own, your personal liability can be limited or unlimited.
Liability in a General Partnership
Each partner in a general partnership is subject to unlimited personal liability. According to partnership rules, all partners are legally responsible to pay off all the debts incurred by their business. In some states, a partner in a general partnership is severally liable. This means that the partner is liable for the company debts if another partner cannot afford to pay them off.
Unlike some other business entities, a general partnership does not have to be officially set up. It can be formed without any specific intent. As long as two or more people agree to start a business together, there is sufficient proof that a partnership exists.
Liability in a Limited Partnership
A limited partnership differs from a general partnership in that its partners are not unlimitedly liable for its debts. Similar to shareholders of a corporation, the partners can only lose up to the amount they invest in the partnership. As long as it has a minimum of one general partner, a limited partnership can have any number of each type of partners.
In this type of partnership, a limited partner is not allowed to take part in the company's managerial decisions or day-to-day operations. As such, the general partners are typically regarded as the original founders while the limited partners are considered outside investors.
The main advantage of a limited liability partnership is that a partner's liability is limited to his or her actions. This means that the partner will not be held liable for issues that result from other partners' misconduct or negligence. Additionally, a limited partnership is easier to form than other types of business entities. It does not have to comply with the state filing requirements that apply to other types of businesses. State laws also do not require the recreation of a partnership if an existing partner leaves the company or a new partner is added.
Each partner will be protected from the company's debt obligations. Although they are not liable for the actions of other partners, all partners in a limited partnership assume the general obligations of the company. Individual partners are responsible for the limited partnership's operating expenses and debt obligations, including:
- Property leases
- Vehicle leases
- Business loans
Also, a limited liability partnership does not provide liability protection against fraud claims or the negligent actions of employees. It also does not protect partners who are a part or witness of the criminal actions of another partner.
Differences Between Partnership Liability and Personal Liability
In a limited partnership, one or more partners have limited liability. This kind of partnership must be formed with a minimum of one general partner and one limited partner. A general partner is different from a limited partner in that the partner has full management power and unlimited personal liability. In this sense, a limited partnership's partnership agreement is similar to that of a general partnership.
In contrast, the liability of a limited partner is determined by the amount he or she has invested in the company. Also, a limited partner is limited in his or her involvement in management. He or she is not always protected. In the event that the limited partner plays a more active role in the company, he or she will have the same level of liability as a general partner. Unlike a general partnership, a limited partnership is formed through registration with the state.
In a limited partnership, partners receive more protection against each other's mistakes. For instance, if several accountants set up a limited partnership and a customer sues one of them, the other partners will not be liable for the judgment. Nevertheless, as in other types of partnership, the partners in a limited partnership are legally bound by the contracts they sign when the company is formed.
If you need more information or expert advice on partnership business liability, 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.