What are the differences in a general partnership limited partnership and a limited liability partnership?

by Chris Hinson

A partnership (also referred to as a general partnership) is a business arrangement where two or more people (who are not husband and wife) are owners of a business. Unlike a corporation, you do not need to file any documents with the state to make your business a partnership. A partnership is created by default, unless the business is specifically formed as some other type of business entity, such as a corporation, a limited liability company, or a limited partnership.

A general partnership is one in which all of the partners have the ability to actively manage or control the business. This means that every owner has authority to make decisions about how the business is run as well as the authority to make legally binding decisions. Unless the partners have a partnership agreement, each partner will have equal authority.

Partners in a general partnership don't have any limit on their personal responsibility for the debts of the business. This means that the partner could lose more than just his investment in the business - personal assets would have to be used to pay business debts if necessary. Each partner in a general partnership is also "jointly and severably" liable for debts of the business. Joint and severable liability means is that each partner is equally liable for the debts of the business, but each is also totally liable. So if a creditor can't get what he is owed by one or more of the partners, he can collect it from another partner, even if that partner has already paid his share of the total debt. If someone sues your partnership and obtains a large judgment, and your partner doesn't have the money to pay his share of it, you will have to pay the entire amount.

A limited partnership is different from a general partnership in that it requires a partnership agreement. Some information about the business and the partners must be filed with the appropriate state agency (usually the secretary of state).

Additionally, a limited partnership has both limited and general partners. A limited partner is one who does not have total responsibility for the debts of the partnership. The most a limited partner can lose is his investment in the business. The trade off for this limited liability is a lack of management control: A limited partner does not have the authority to run the business. He is really more or less an investor in the business.

A limited partnership must have at least one general partner. The general partner or partners are responsible for running the business. They have control over the day-to-day management of the business and have the authority to make legally binding business decisions. The partnership agreement will specify exactly which partner or partners have certain responsibilities and which have certain authority. General partners are also subject to unlimited personal liability for the debts of the business. The general partners of a limited partnership are also jointly and severably liable for the debts of the business, just like partners in a general partnership. If you need a business type that limits the liability of all partners, LLC formation could be your best choice.

If you're looking to form a partnership in the state of Delaware, it's important to choose the correct type of partnership for your business needs. 

When forming a partnership using our easy online ordering form, you will find that there is a drop down menu with three partnership types to choose from. Let's take a look at each type of Delaware partnership.

General Partnership

General partnerships are the original type of partnership. A general partner is considered the owner of the partnership. General partners are actively involved in the management of the partnership and can make decisions on the company's behalf. There can be more than one general partner. 

General Partnerships offer no liability protection for the partners. All partners are held liable if one partner is sued. Many compare the general partnership to a sole proprietorship in this regard. 

This type of entity has subsequently become less popular as other entity types allow for more liability protection. 

Limited Partnership

A Limited Partnership has both a general partner and a limited partner.

Limited Partnerships are formed when a partner is an investor in a business but is not involved in day-to-day operations. The general partner is responsible for the management of the partnership and the limited partner is generally an investor only. Limited partners are often referred to as silent partners. They invest capital in exchange for a portion of the profits of the partnership.

The liability of a limited partner is determined by their investment in the partnership. They generally have limited liability in the company's debts and liabilities, up to the amount of capital that they have invested in the business. 

Limited partners must be careful though - if during litigation it is determined that they spend a significant amount of time managing the business direction, it can be determined that they were in fact acting as a general partner.

Limited Liability Partnership

Limited liability partnerships are the most common choice for professionals including attorneys, accountants, doctors, dentists, and other businesses that fall into the professional category.

Much like an LLC, the limited liability partnership protects the personal assets of the partners so they may not be used to satisfy business debts and liabilities. Individuals within a limited liability partnership may be held personally liable for wrongful or negligent acts but the other partners within the limited liability partnership are not liable for those acts. 

Selecting Your Partnership Type

We hope this helped to clear up any confusion about the different types of partnerships available in the state of Delaware. If you are ready to form your Delaware partnership, we have several partnership packages available to meet your needs. Feel free to contact us with any questions of give us a call directly at 800-223-3928.

DISCLAIMER: The Incorporators LTD. is a business formation service company only.
All content on this site is for informational purposes only and should not be construed as legal, taxation or financial advice or services.

Limited partnerships (LPs) and limited liability partnerships (LLPs) are both businesses with more than one owner, but unlike general partnerships, limited partnerships and limited liability partnerships offer some of their owners limited personal liability for business debts.

What Is a Limited Partnership?

In limited partnerships (LPs), at least one of the owners is considered a "general" partner who makes business decisions and is personally liable for business debts. But LPs also have at least one "limited" partner who invests money in the business but has minimal control over daily business decisions and operations. The advantage for these limited partners is that they are not personally liable for business debts.

The limited liability partnership (LLP) is a similar business structure but it has no general partners. All of the owners of an LLP have limited personal liability for business debts.

In order to better understand LPs and LLPs, it's helpful to compare them to general partnerships.

What is a General Partnership?

In the business world, the word "partnership" usually refers to general partnerships. A general partnership is a business that has more than one owner and that has not filed papers with the state to create a specific entity such as a corporation or limited liability company (LLC). (Click here to learn more about general partnerships.)

In a general partnership:

• all partners (called general partners) are personally liable for all business debts, including court judgments
• each individual partner can be sued for the full amount of any business debt (though that partner can, in turn, sue the other partners for their share of the debt), and
• each partner has "agency authority" for the partnership -- that is, each partner can bind the whole business to a contract or business deal.

How Are Limited Partnerships Different?

A limited partnership has at least one general partner and at least one limited partner. The general partner has the same role as in a general partnership: controlling the company's day-to-day operations and being personally liable for business debts.

The role of limited partners, however, differs in a few ways:

• Limited partners do not play an active role in the business. The limited partners (most LPs have more than one limited partner) contribute financially to the business (for example, a limited partner might invest $100,000 in a real estate partnership) but have minimal control over business decisions or operations, and normally cannot bind the partnership to business deals.
• Limited partners are not personally liable. In return for giving up management power, limited partners get the benefit of protection from personal liability. This means that a limited partner can't be forced to pay off business debts or claims with personal assets. A limited partner, however, can lose his or her financial investment in the business.
• Limited partners face slightly different tax rules. For income tax purposes, limited partnerships generally are treated like general partnerships, with all partners individually reporting and paying taxes on their share of the profits each year. Limited partners, as a rule, do not have to pay self-employment taxes; because they are not active in the business, their share of partnership income is not considered "earned income" for purposes of the self-employment tax.

Limited partners need to understand that they can become personally liable if they do not stick to their passive role. If a limited partner starts taking an active role in the business, that partner's liability can become unlimited. If a creditor can prove that a limited partner took acts that led the creditor to believe that he or she was a general partner, that partner can be held fully and personally liable for the creditor's claims.

What Is a Limited Liability Partnership?

Another kind of partnership, called a limited liability partnership (LLP) or sometimes called a registered limited liability partnership (RLLP), provides all of its owners with limited personal liability. LLPs are particularly well-suited to professional groups, such as lawyers and accountants. In fact, in some states LLPs are only available to professionals.

Professionals often prefer LLPs to general partnerships, corporations, or LLCs because they don't want to be personally liable for another partner's problems -- particularly those involving malpractice claims. An LLP protects each partner from debts against the partnership arising from professional malpractice lawsuits against another partner. (A partner who loses a malpractice suit for his own mistakes, however, doesn't escape liability.)

Forming a corporation to protect personal assets may be too much trouble. In addition, some states (including California) won't allow licensed professionals to form an LLC.

Limited Partnerships vs. LLCs

An LLC is similar to a limited partnership in that it provides liability protection to the owners of the business, and the owners have flexibility in deciding how the business will be managed. However, unlike limited partnerships, all of the owners of the LLC have limited liability protection. For more information, check out LLCs and Limited Liability Protection.

In addition, states typically have different formation paperwork for LLCs than for LPs. Further, while partnerships use partnership agreements to delegate rights and responsibilities, LLCs use operating agreements to outline the internal operating procedures.

To learn more about choosing between an LLC and an LLP, check out LLC vs. LLP: What Is the Difference?.

How to Create an LP or LLP

Creating a limited partnership or limited liability partnership is done at the state level. Each state has its own rules, but in general, you must pay a fee and file papers with the state, usually a "certificate of limited partnership" or "certificate of limited liability partnership." This document is similar to the articles (or certificate) filed by a corporation or an LLC and includes information about the general and limited partners. Filing fees for LPs and LLPs are similar to those for corporations and LLCs.

For more information on limited partnerships, including how to draft a limited partnership agreement, get Form a Partnership: The Complete Legal Guide, by Ralph Warner and Denis Clifford (Nolo).