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What is the difference between a general and limited partnership?

On Behalf of | Oct 6, 2021 | Business Law

Choosing the best business form for your purposes is an important decision. Each form carries advantages and disadvantages that must be considered. The number of participants, the nature of the business and its long-term goals will all impact which form provides the best fit. The partnership is one such business form, but there is more than one type.

The general partnership

General partnerships are very similar to sole proprietorships, but with multiple owners of the business. They are easy to form, since they don’t require you to file any documents to create. Instead, a general partnership is created as soon as two or more people begin doing business together. The only filing requirement is to register the name and contact information for the newly created business.

Simplicity is one of the primary advantages of a general partnership. Additionally, unlike a sole proprietorship, there is more than one person who can manage the business and make decisions. This fact also defines one of the disadvantages of a general partnership – both partners are liable for all debts and responsibilities of the business. There is no protection for a general partner, since they can be held personally liable. Their personal assets can be used to satisfy the business’s obligations.

The limited partnership

Unlike the general partnership, the limited partnership must be created by filing a certificate of partnership with the Kentucky Secretary of State. This partnership contains at least one general partner and at least one limited partner. As with the general partnership, general partners in a limited partnership have control over the business and are responsible for the day-to-day operations. They can also be held personally liable for debts and obligations.

Conversely, limited partners cannot take an active role in the business. Doing so would violate the nature of the partnership. The advantage for the limited partner is a level of protection the general partner does not have. Instead of being personally liable, the limited partner risks only the investment they have made in the business. The limited partner sacrifices control of the business for protection of their personal assets.