General partnership vs. limited partnership

What is a general partnership (GP)?

Asking one or more people to join you as partners in your business typically creates a general partnership. Without a formal agreement, all profits and liabilities will be distributed equally. General partnerships are not business entities, so you may not be required to hire a registered agent or register it with the Secretary of State.

A written partnership agreement is not required if you choose this business structure, but it is recommended. General partners have full management control and unlimited personal liability for the business, including business debts and income tax. Drafting business formation documents or partnership agreements can define that for everyone involved.  

Why create a GP?

General partnerships are a common business structure in the start-up phase when business decisions must be shared with a team. Each party in those agreements must do their own IRS tax returns and pay an equal share of the company’s debts. GPs are also an alternative to LLCs or corporations when the parties involved don’t want to go that route.

Drawbacks to forming a GP

The primary drawback of a general partnership is that all business owners have unlimited personal liability. That means they put their personal assets at risk if the business partnership fails. They’re also responsible for state and federal taxes on profits and losses. General partnerships are pass-through entities, so there’s only one level of taxation. 

Is a joint venture a type of general partnership?

A joint venture is not a general partnership because it is an agreement to work together on one specific project. General partnerships are business structures that are designed for continuous business operations. Unincorporated joint ventures are also not legal entities. The parties involved have no personal liability protection.

What is a limited partnership (LP)?

A limited partnership differs from a general partnership in several ways. This type of partnership determines who controls the company's day-to-day operations. It can be used to bring in silent partners who have no management roles. One general partner needs to be involved who has full management control. Investors can be set up as limited partners. 

Limited partnerships are often a bridge between sole proprietorship and incorporation. They need to be registered with the state because business profits are distributed according to the terms of the partnership agreement. Apart from the general partner, personal liability is limited to the investment each limited partner makes in the company.      

Why create a limited partnership?

This type of business structure is common in private equity and real estate deals where two or more parties pool their money. The general partner handles operations, negotiating, and closing deals with backing and support from the limited partners. This eliminates the need for group consensus when quick decisions need to be made.  

What are the requirements for forming a limited partnership?

At least one general partner and one or more limited partners are needed to form a limited partnership. The entity must be registered with the state where it was formed, usually with the Secretary of State’s office. 49 of the 50 states, including New York and California, use the Uniform Limited Partnership Act as a guideline. As of October 2024, Louisiana is the only state that doesn’t.    

LLP and LLLP

A limited liability partnership (LLP) is a limited partnership without a general partner. It’s essentially a hybrid of a general partnership and a limited liability company. All partners take on only the liability commensurate with their investment amount. This makes sense for joint ventures that need to be documented and registered. LLPs are easier to dissolve than corporations.

A limited liability limited partnership (LLLP) is an LLP with a general partner. However, in this structure, the general partner has limited liability. It’s not a common model, and LLLPs are not recognized in every state. Like other limited partnerships, there’s a filing fee, and you must have an employer identification number (EIN) to conduct business. 

LLPs and LLLPs don’t pay federal income tax but may be liable for an annual state tax in some states. You should also expect to pay state filing fees. All other liabilities are passed through to the partners. The business must file Form 1065 to report its income and issue a Form 1099-K to each partner for tax filings. Annual meetings are generally not required.

Partnerships vs. corporations

The key differences between partnerships and corporations include how business income is distributed. In a partnership, it’s typically divided among the partners. Corporations issue shares of stock and pay dividends, so business income is held to build the company. Investors don’t cash out until the company is sold or it goes public. 

Another difference is liability. General partnerships are risky because all partners assume full liability. Limited partnerships mitigate some of that risk. Corporations protect the directors and officers from personal liability. Their biggest risk is losing the money they’ve invested in the business.  

Limited liability partnership (LLP) vs. limited liability corporation (LLC)

The acronyms can be confusing. The differences here are ownership structure and liability. An LLP is a limited liability partnership where all partners have limited liability. An LLC is a corporation a single person can own, offering personal liability protection to owners. Investors can be set up as members of the LLC with equal protection.

How to form a limited partnership

Limited liability companies offer several advantages to the principles involved in a business venture. Speak with your business attorney about which of these is best for you so you’re prepared to draft a partnership agreement when the time comes. Here are the steps you’ll take next:  

Choose a name

Naming a limited partnership is not the same as creating a brand for a retail business, but you’ll want to call it something that aligns with your business goals. It could be the partners' names, i.e., Smith and Jones, LP. There are no state or federal regulations on what you name the company, so feel free to be creative.

Select a registered agent

A registered agency (RA) is a person or company responsible for receiving legal correspondence on behalf of the company. This is not required for a general partnership, but any limited partnership is required to have a registered agent. Your local Secretary of State’s office or business service should have a list of registered RAs in your state.  

File a certificate of limited partnership and pay the filing fees

A certificate of limited partnership (CLP) states your intent to form a partnership and should include the partnership agreement. The filing fee is usually a few hundred dollars. According to the Corporate Transparency Act, you may also be required to submit beneficial ownership information (BOI) to the Financial Crimes Enforcement Network (FinCEN).    

Draft a partnership agreement

A limited partnership agreement should include the scope of the partnership, the partners' roles, profit and loss sharing, decision-making and dispute resolution processes, dissolution plans, initial capital contributions, and tax allocations for the partners. It should also include a disclaimer that outlines any restrictions on the partners.

Obtain an employer identification number (EIN)

You can apply for an employer identification number (EIN) online at the Internal Revenue Service. The EIN is essential for any business because it separates the tax liability associated with the owner’s social security number from the business tax liability.

Apply for licenses and permits

Certain types of businesses must apply for licenses or permits to operate in the jurisdiction in which they’re located. An example is a real estate license to sell residential or commercial property. Another is a vendor’s license to sell certain retail products or food. You can research permits and licenses at your local town or city hall or have your attorney do it.

Open a business bank account

This is one of the tasks you’ll need an EIN for. Business bank accounts are attached to an employer identification number. Personal accounts are attached to a social security number. This makes a difference when you report income. Limited partnerships have more than one person liable for paying taxes, so the bank account must be for a business entity, not an individual.  

Obtain liability insurance

The liability protections inherent in a limited partnership protect the personal assets of the business's principals. Liability insurance protects the company from being financially liable for accidents, defective goods, and situations where customers or clients suffer financial or physical damages. It’s wise not to do business as a limited partnership without it.

Benefits of limited partnerships

Limited partnerships are registered business entities with the terms of their partnership agreement on file with the state. That eliminates disputes over profit sharing and control of the company. LPs are also pass-through entities with only one level of taxation. Tax liability is allocated based on the investment contributed by the limited partners.  

Disadvantages of limited partnerships

The main disadvantage of a limited partnership is the same as one of its advantages. It’s a pass-through entity without a corporate umbrella to protect the individual partners. If things go bad, the partners are legally and financially responsible. Liability insurance can offset some of that risk. Turning the LP into an LLP or LLLP adds another layer of protection.   

General partnership example

Two people, Maleek and Marlene, decide to open a coffee shop. They’re close friends and want the shop to be an equal partnership. Foregoing any written agreement, they shake hands, invest equal money to get started, and open under the name “M&M Java Joint.” The business thrives, and the profits are split equally. That’s an example of a general partnership. 

Limited partnership example

Using the example from above, let’s say Marlene wants to manage the coffee shop's operations, and Maleek wants to be a silent party. They form a limited partnership because the profits will not be split equally, and Marlene is putting in most of the sweat equity. They agree on profit shares. Marlene becomes the general partner. Maleek is the limited partner. 

FAQs about general partnership vs. limited partnership

What is the difference between a general partnership and a limited partnership?

In a general partnership, all partners have full liability, and profits are split equally. There’s also no state requirement to register a general partnership. There is a registration requirement for limited partnerships, and profits are split based on the partners' investments.    

What type of business is a limited partnership?

A limited partnership is a legal entity that must be registered in the state where it operates. 

What is the difference between an LP and an LLP?

An LP is a limited partnership that requires one principal to be a general partner and assume full liability. An LLP is a limited liability partnership where every partner has limited liability.  

What is limited partnership taxation?

LPs are pass-through entities, meaning the partners hold the tax liability, not the company. 

Can you have an LP without a GP?

No. One of the partners in a limited partnership must be a general partner. You can form a limited liability partnership (LLP) if you want to bypass that requirement.  

Wrap-up

Your business structure can determine your personal liability for the company. To recap, general partners take on full liability, and limited partners take on limited liability. A general partner also has full management control over the business, whereas limited partners may have little or no control. These are important distinctions that affect day-to-day operations. 

LLPs and LLLPs provide additional protections for business owners and offer the flexibility to bring in new partners with creative profit-sharing and liability protections. But if you need additional guidance on any of these, be sure to contact your business attorney or sit down with an accountant to learn more.

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Note: This content is for informational purposes only. It doesn't necessarily reflect the views of Rho and should not be construed as legal, tax, benefits, financial, accounting, or other advice. If you need specific advice for your business, please consult with an expert, as rules and regulations change regularly.