General partnerships and limited partnerships are common approaches to setting up a small business with multiple owners. The primary difference is that all partners share liability risks in a general partnership, whereas limited partners have fewer risks in an LP structure.
General Partnership Basics
In a general partnership, two or more people or business entities go into business together. Partnerships are registered in the state of operation, but face limited formal requirements during setup and management. In a general partnership, all partners share in the operation of the company, and also assume unlimited liability risks. Unlimited liability refers to the fact that partnerships aren't treated as separate tax-reporting entities from their owners. Additionally, individual owners face the loss of personal assets if the business is sued or unable to pay its debts.
While liability risks are a key drawback, prominent advantages of a general partnership include:
- Limited formal requirements
- Pass-through taxation, meaning owners only pay taxes on their income distributions
- Limited operational costs aside from those related to the business
Limited Partnership Basics
Limited partnerships have some similar benefits to general partnerships. However, a limited partnership requires at least one general partner and one limited partner. The general partner's role is much the same as with a general partnership structure, but the role of limited partners is very different. A limited partner's involvement is primarily financial. Limited partners don't take active roles in managing the business; instead, they invest money in the hopes of making income from profits. Limited partners also don't take on unlimited liability like the general partner.
A major reason an entrepreneur would opt for a limited partnership structure is a desire to maintain control of the company, but still invite financial investment. Limited partnerships often are more complex to set up and operate relative to a general partnership. For limited partners, though, the ability to invest without the need to dedicate time to the company is an advantage.
Additional benefits of a limited partnership structure include:
- Allow for specialized setups and short-term opportunities, such as family estate planning
- The ability for an entrepreneur to seek non-debt capital