Why Are There Different Types of Partners in a Limited Partnership?

A Limited Liability Partnership is one of the most commonly used business structures. It is comparable with corporations in its potential uses, and often individuals that are looking at starting a company will be choosing between a corporation and a limited partnership because they can serve much the same purpose depending on the circumstances.

One of the key benefits of a limited partnership, and what sets it apart from most other unincorporated companies, is that it allows its partners to invest in the company without taking on any liability beyond their initial investment. This is permitted because of the unique structure of limited partnerships, and specifically the coexistence of “General Partners” and “Limited Partners”.

The utility of a limited partnership is almost entirely derived from the fact that it can shield certain of its partners from liability, by imposing that liability directly on other partners. This is based in the fundamental and simple trade-off built into the structure of a limited partnership, that is: greater say leads to greater risk.

General partners are uniquely responsible for the day-to-day management and operations of the partnership. Limited partners, on the other hand, are strictly prohibited from taking part in certain managerial roles. Meaning, the limited partners act as passive investors in the partnership, contributing capital and reaping rewards (or sustaining losses and reaping potential tax benefits), and as a result they are shielded from the liabilities of the partnership. General partners serve the opposite purpose. They are fully responsible for the management of the partnership, and as a result, fully on the hook for its liabilities.

This may seem like a very risky proposition for the general partner, but if structured properly that is not necessarily the case. As a starting point, most limited partnerships are designed to have a general partner that is itself a corporation. Meaning that the shareholders who own the general partner are shielded from liability, and it is only the assets the general partner corporation that is liable for the debts and liabilities of the partnership. Furthermore, the general partner can be a limited partner at the same time, allowing them to share in the profits (and tax benefits) of the partnership along with the other limited partners.

Not only does a limited partnership allow its partners the flexibility of choosing to be either a passive or more active investor, but like any partnership, a limited partnership can provide important tax benefits to its partners. Furthermore, partnerships can be carefully customized, by way of the partnership agreement, to suit the partnership’s specific circumstances and needs.

If you are starting a company and want to learn more about what business structures would work best for you, contact HazloLaw today.