General partner

General partner is a person who joins with at least one other person to form a business. A general partner has responsibility for the actions of the business, can legally bind the business and is personally liable for all the business's debts and obligations.[1]

General partners are required in the formation of a:

Understanding a General Partner

A general partner not only act on behalf of a business, but has the power to make decisions with or without the permission of the other partners. However, this comes at the cost of unlimited liability, which means that the partner or partners are fully responsible for all business debts.[1] This form of personal liability does not have a limit, like a limited liability, meaning that these partners are risking their personal assets for sale or seizure in order to repay the business debts.[2] For example, if a patient sues an orthodontist for medical malpractice, the client who is suing, which is called the plaintiff, can sue all the general partners in the practice. If the defendants, the general partners, are found guilty, then all of the general partners in that practice would be financially responsible. Furthermore, a key aspect of general partners are that they are subject to liquidation.[1] This means that when a business is coming to an end or has reached a dissolution, its the way the assets would be distributed to each of the claimants, such as the general partners, shareholders, or creditors.[3]

Forms of Partnerships

A partnership is a business that is formed with one or more persons. An advantage of forming a partnership is pass-through taxation, which means that income "passes-through" to its owners, regardless of it being a profit or loss.[4] Furthermore, debts and liabilities are also aspects that "pass-through" as well.

There are four types of partnerships:

  1. General partnership
  2. Limited partnership
  3. Limited liability partnership
  4. Limited liability limited partnership

Of the four types of partnerships only three — general partnership, limited partnership, and limited liability limited partnership — require a general partner or general partners upon formation.[4]

A general partnership is one of the most basic forms of a partnership. It is one of the business entities that does not require being registered with the state, so it can be formed through a formation of a partnership agreement. Under this type of partnership, each partner becomes a general partner, meaning that every partner is responsible for the business and has unlimited liability. Advantages of forming a general partnership are:[5]

  • simplified taxes due to the pass-through taxation, which passes all profits and losses to individual partners
  • easy to establish
  • easy to dissolve

Disadvantages of forming a general partnership are:[5]

  • unlimited liability
  • partners are liable for each other

A limited partnership (LP) is a business entity that is required to be formed through the state. In this type of partnership, a business needs to have at least one general partner and one or more limited partners. The general partner would be subjected to unlimited liability, while the limited partners would have limited liability, meaning a person's financial liability is fixed.[4] While the limited partner or partners do provide the monetary aspect of the business, they do not get to actively contribute to the management of the business. Furthermore, as a limited partner one would not be able to lose more money than they have contributed adding to their protection.[5] Advantages of a limited partnership are:[6]

  • personal liability protection for limited partners
  • pass-through taxation
  • no self-employment taxes for limited partners

Disadvantages of a limited partnership are:[6]

  • unlimited personal liability for general partner or general partners
  • no management or limited management contribution for limited partners
  • ownership is hard to transfer
  • difficult flexibility to change management roles

A limited liability limited partnership is a relatively new business entity. In this type of partnership, there is one general partner, who manages the business, however under this type of partnership general partners also have limited liability as the limited partners. Though this may seem like a good option for certain partnerships, it is not recognized in all states.[4]

Limited Partners v. General Partners

Characteristics of a limited partner and general partners vary in not only business management, but other aspects, such as liability and agency powers. In regards to liability, limited partners have limited liability, meaning that limited partners are not personally liable, so they do not have to have to use their personal assets and money to pay off any business debts.[7] However general partners, have unlimited liability, meaning they do not have the same protections as limited partners. Under this liability, general partners are fully responsible for any and all business debts with all personal assets as fair game. Limited partners get the benefit of protection from personal liability at the cost of management power. General partners are fully involved with their businesses, however limited partners do not get any management power and decision making for any business activities.[8] Limited partners can vote and be a part of decision-making processes regarding items that do not influence business management or operations. Regarding agency powers, general partners are able to make decisions that are fully and legally binding in connection to the business, however limited partners do not have that ability.[8] Taxation is also different between limited and general partners. Limited partners do not have to pay self-employment taxes, due to the fact that they are not considered as active members of the company.[7] This is due to limited partners giving up management power in order to get protection from personal liability. General partners have "pass-through" taxation, meaning that they are taxed on their share of all profits and losses.

General Partners in Different Countries

Europe

The Partnership Act 1890, which was an act of Parliament of the United Kingdom, governing the rights and duties of people and corporate entities conducting a partnership, was the first law allowing for partnerships. In the United Kingdom, general partners within a general partnership are personally liable for any and all business debts and claims.[9] This is also how it is perceived in the United States, where all general partners are personally liable. The taxation is also similar, in the sense that the business profits and losses are shared between all partners and each partner would be taxed individually on their share, which is similar to the "pass-through" taxation.[9] However, Scotland has a very distinct aspect regarding general partnerships that differentiates it from other countries within the United Kingdom. In Scotland, general partnerships are considered separate legal personalities, meaning a general partnership entity is able to do things such as, own assets in its own name, borrow money and grant security of assets that are within its own name and, bring issues to court in its own name.[10]

Article 1832 of the Civil Code in France, describes a partnership under the French Commercial Code. Just like the United States, a general partnership consists of general partners, who are personally liable for all of the business debts and claims. Furthermore, taxation is based on individual partners, rather than the partnership being taxed through income or corporate tax. Partnerships in France are also considered as separate legal personalities. [11]

Asia

In Japan, general partnerships are called Kumiai. They are made up of general partners, whom have unlimited liability, like in the United States, meaning general partners are fully responsible for any and all business debts and claims. This was founded under Civil Code Act No. 89 of 1896, in which it describes general partnerships as an engagement between partners who decide to jointly run a business.[12] Although no formal proceedings are necessary to enter a partnership agreement, it is important to know that just like in the United States, general partners are taxed with a "pass-through" taxation. Furthermore, unlike countries such as France and parts of the United Kingdom, Japan does not consider general partnerships as separate legal entities.[12]

The Indian Partnership Act of 1932, was a law that described partnerships based in India, which was the relationship between individuals who have decided to share profits of a business. An interesting note about partnerships in India, is the fact that status does not relate to a formation of partnerships. In order to have a partnership that is recognized, the people who are engaged must have some sort of contract, which differentiates this country from countries such as the United States, the United Kingdom, and Japan.[13] Furthermore, partners who engage in a general partnership, are also called general partners, who just like in the United States, have unlimited liability.[13]

References
  1. "General Partner Definition". Investopedia. Retrieved 2021-12-08.
  2. "With Unlimited Liability, You Are Responsible for Any Business Debts". Investopedia. Retrieved 2021-12-08.
  3. "Liquidation: What You Need to Know". Investopedia. Retrieved 2021-12-08.
  4. "4 Types of Business Partnerships: Which Is Best for You?". www.score.org. 2020-06-23. Retrieved 2021-12-08.
  5. "General Partnership". Corporate Finance Institute. Retrieved 2021-12-08.
  6. "Forming a Limited Partnership: What You Should Know". Investopedia. Retrieved 2021-12-08.
  7. Pakroo, Peri. "Limited Partnerships and Limited Liability Partnerships". www.nolo.com. Retrieved 2021-12-15.
  8. Marquee, Team. "Limited Partner vs General Partner". The Marquee Blog. Retrieved 2021-12-15.
  9. "What is a general partnership?". Inform Direct. 2017-08-24. Retrieved 2021-12-15.
  10. "Establishing a business in the UK (Scotland)". Practical Law. Retrieved 2021-12-18.
  11. Derouin, Philippe Derouin-Philippe (2019-09-27). "Regulation of partnerships in France". Lexology. Retrieved 2021-12-18.
  12. "Establishing a business in Japan". Practical Law. Retrieved 2021-12-18.
  13. "Tax Laws & Rules > Acts > Indian Partnership Act, 1932". Income Tax Department. Retrieved 2021-12-17.{{cite web}}: CS1 maint: url-status (link)
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