Managing a company without having to take responsibility for your assets? This is possible with a limited liability company (LLC) and this is the reason that many business owners in the US choose this legal structure. We explain what an LLC is, its hierarchy, as well as naming some of the advantages and disadvantages of this kind of business structure.
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.
Definition: What is a general partner?
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 the partner who is personally liable within a limited partnership. They bear the direct and joint liability, with both the business and their own private assets, and usually act as managing director and representative of the company. A limited partnership can also comprise of several general partners who can be both natural and legal persons.
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.
General partner liability
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.
General partner: rights
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.
A limited partnership only requires one managing general partner. However, several natural persons or legal entities can also be active as general partners and jointly manage the company within the framework of a management board, and represent it externally.
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.
Find out what needs to be considered when setting up a limited partnership in our 1&1 IONOS StartUp Guide.