General partner in a limited part­ner­ship: both managing director and general partner

The limited part­ner­ship is a legal business form often chosen if several people want to join forces and run a com­mer­cial business. This is because in many ways it is easier to found a business part­ner­ship than a cor­po­ra­tion, and doesn’t require any minimum capital.

This specific form of part­ner­ship has com­plete­ly different liability reg­u­la­tions that a sole pro­pri­etor or a private cor­po­ra­tion, for example. With struc­tures like those, all partners are liable in equal measures. However, in limited part­ner­ships, there is a clear dif­fer­ence between a limited partner (or several) and a general partner. The latter is com­plete­ly liable, but is also the sole leader of the company. In this article, you will find out what the exact rights and oblig­a­tions of a general partner are.

A limited part­ner­ship should always consist of at least two partners – a limited partner and a general partner. Both can be natural persons, as well as legal entities. A limited partner usually “just” acts as a financial donor and does not actively par­tic­i­pate in day-to-day business. As a result, they are only partially liable for li­a­bil­i­ties in the limited part­ner­ship.

On the other hand, the general partner acts as managing director and rep­re­sen­ta­tive of the en­ter­prise ex­ter­nal­ly, and therefore takes over the full running of the company. Since they are liable for the set­tle­ment of possible debts, not just with the limited part­ner­ship’s business assets, but also with their private assets should the situation arise, they bear the greatest risk when forming a limited part­ner­ship.

A general partner is often the ambitious founder who lacks the necessary capital or other resources (e.g. workspace, know-how, tech­nolo­gies) to implement their business idea. They therefore turn to family members, close relatives, or friends to try and convince them to become share­hold­ers. As limited partners, they con­tribute equity capital in the form of cash or other con­tri­bu­tions, and as a result, par­tic­i­pate in all profits generated by the company. At the same time, they only have to accept a com­par­a­tive­ly low risk (namely, the loss of their equity capital) and do not need to par­tic­i­pate in day-to-day business.

The part­ner­ship agreement of a limited part­ner­ship has almost no formal re­quire­ments, which grants the partners a con­sid­er­able amount of leeway with the design of their company. However, this is not the case when it comes to liability: the limited partner is limited in principle, ex­clu­sive­ly up to the limit of their personal partner capital con­tri­bu­tion, i.e. the money or assets con­tributed to the en­ter­prise. Their private assets remain untouched.

General partner liability, on the other hand, is unlimited, and their personal assets can be at risk, if the business goes bankrupt and sig­nif­i­cant debts need to be repaid.

If several general partners are involved in the en­ter­prise, they must bear the total debt in equal parts together, unless otherwise agreed in the articles of as­so­ci­a­tion. However, if an in­di­vid­ual general partner does not pay enough, the dis­ad­van­taged partners have the right to claim com­pen­sa­tion, which is usually made by in­dem­ni­ties and less often by re­im­bursed payments. In­di­vid­ual con­trac­tu­al pro­vi­sions with creditors may permit a lim­i­ta­tion of liability under certain cir­cum­stances. It is also not unusual for a limited liability company to act as the general partner in a limited part­ner­ship. Liability is then limited to the LLC’s assets.

Liability is therefore the most important dif­fer­ence between the limited partner and the general partner in a limited part­ner­ship. However, at the beginning it is not easy to com­plete­ly separate them. As long as the limited partner con­tri­bu­tion has not been made and properly doc­u­ment­ed, the limited partner is treated as a general partner from a legal per­spec­tive, with all the as­so­ci­at­ed li­a­bil­i­ties. This is par­tic­u­lar­ly dangerous if the founding partner turns out to be un­trust­wor­thy. In order to avoid risks, the limited partner should only join a limited part­ner­ship once their capital con­tri­bu­tion and position as a limited partner are ac­cu­rate­ly reg­is­tered – not a moment earlier.

A general partner has an increased liability risk, but they also have more power within the company. This special right to man­age­ment and rep­re­sen­ta­tion puts them in the position of the sole decision-maker in the company – at least as far as usual actions like pur­chas­ing goods, writing checks, and hiring and firing employees is concerned. They are also entitled to a special re­mu­ner­a­tion for their personal com­mit­ment as managing director. Each partner (including the general partner) also receives a set amount of interest on their capital shares from the remaining profits. The leftover income is dis­trib­uted equally among the share­hold­ers.

Since the limited partner is only partially liable for the limited part­ner­ship’s li­a­bil­i­ties, they are au­to­mat­i­cal­ly excluded from man­age­ment according to the Uniform Limited Part­ner­ship Act (ULPA). However, amend­ments made to this law in 2001 allow limited part­ner­ships to become limited liability limited part­ner­ships, which means that general partners are no longer solely re­spon­si­ble for limited part­ner­ship debts. However, it is up to each state to decide whether or not to include this amendment in their leg­is­la­ture, so depending on what state your business is located in, it may or may not apply to you. Con­sult­ing with your Secretary of State and a legal pro­fes­sion­al can answer any questions, and doing so will ensure that your business op­er­a­tions are legally wa­ter­tight.

In a limited part­ner­ship, limited partners have no voting, res­o­lu­tion or objection rights, unless otherwise stated in the articles of as­so­ci­a­tion. If the articles do permit this, the scope of a limited partner is still often re­strict­ed and excluded from man­age­ment. This does not affect their right to inspect business accounts or company papers at any time in order to obtain an overview of the business situation based on the balance sheet.

Click here for important legal dis­claimers.