Partnership businesses are formed by partners who share common business goals. These partners can be general or limited. This list elaborates on the core differences between a General Partner vs Limited Partner.
General Partner Vs Limited Partner
A general partner has unlimited liability. On the contrary, a limited partner has a limited liability.
If a general or a limited partnership business has a loan default, the general partner is liable beyond their initial capital contribution. Lenders can take the general partner’s assets and sell them to get the money back. Personal assets of a general partner are thus used as collateral alongside the initial capital contribution of other partners.
The liability of a limited partner does not go beyond their initial capital contribution. If a partnership business has due financial obligations, their assets cannot be taken away by lenders. This is because the personal assets of limited partners do not qualify as collateral or security of a loan facility.
2. Role in management:
A general partner runs and controls the daily operations of the partnership business. On the contrary, a limited partner does not have an active role in managing the business.
Since a general partner is an active manager in a partnership business, they must report to their office or designated workplace daily.
A limited partner does not have to report to their partnership business’s workplace daily. It is possible to have no designated office for limited partners. Instead, offices are designated for a general partner and any other person employed by partners to run their business on their behalf.
A general partner is entitled to monthly compensation. However, a limited partner does not get any monthly compensation.
Monthly compensations for a general partner are since they co-manage the partnership business in question. They must commit their time to running the business affairs of their partnership. To appreciate their selfless contribution to running the partnership in question, other partners must set aside monthly dues for a general partner(s).
A limited partner does not commit their time to running the partnership business in question. They only inquire about updates about business performance. Due to their absence from the actual management, there are no monthly dues set aside for them.
A general partner has the authority to act on behalf of other partners without seeking approval. Unlike a general partner, a limited partner cannot act on behalf of other partners without their consent or approval.
The nature of work that a general partner has permits them to have a higher authority. It would be hard for them to run a partnership business successfully by inquiring about every little detail of daily management. They are left with enough room to use their discretion in the management and running affairs of the partnership in question.
There are few chances that a limited partner will act directly on the partnership business. Their input is only demanded in scenarios where all partners must consult in decision-making. If a limited partner is to act on behalf of others by any means, they must have approval.
5. Prior experience:
To run the partnership in question, a general partner must have prior experience and skills. However, it is not mandatory for a limited partner to have the necessary skills to run the partnership question.
It would be risky for all partners to entrust any of them with active management roles with no prior skills and knowledge about the business. To be sure that the general partner will steer the business to greater heights, they must prove by merit that they are qualified for the job.
A limited partner comes in as an investor. They might have some knowledge about the business in question. However, a lack of experience in the intended business is not a barrier to the success of a partnership.
A general partner exists in both general partnership and limited partnership. On the contrary, a limited partner is only found in a limited partnership business.
In a general partnership business, all partners are general partners. Automatically, you cannot find a limited partner in a general partnership.
With a limited partnership, at least one of these partners must be general. This explains why you will find both general and limited partners in a limited partnership business.
7. Effects of death, retirement or insanity:
If a general partner becomes insane, retires or unfortunately dies, the partnership business is dissolved. However, death, insanity or retirement of a limited partner does not cause a dissolution.
In case of death or insanity of a limited partner, their partnership rights and privileges are passed over to their successor(s).