The Differences in Limited Partnership and General Partnership
General and limited partnerships are two different types of business entities in which a number of partners come together to run a business. However, in a limited partnership, certain partners, known as "limited partners," have different rights and responsibilities from the general partners. Those with specific questions about owning or operating a business should consult an attorney or tax professional.
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Partnerships
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When two or more people agree to operate a business, they've created a partnership. Under the Revised Uniform Partnership Act, however, the "people" involved can include corporations, trusts, other partnerships or government entities, among others. Once the two parties involved form the partnership, the law generally treats the partnership as a legal entity separate from the individual identities of the partners. The partnership may acquire land for itself, execute transactions and even be sued.
General Partnership
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In a general partnership, each partner is a "general" partner. Unless the partners agree otherwise, each partner has the equal right to manage the business and has the right to conduct transactions on behalf of the business. The partnership is an independent legal entity, one which can be sued. When someone sues the partnership, the general partner is personally liable for any judgment, meaning that if the partnership has insufficient assets, the judgment can be satisfied by seizing the partner's personal assets. General partners face individual, rather than business, taxation for their partnership profits and losses.
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Limited Partnership
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In a limited partnership, there are two different classes of partners: general partners and limited partners. A limited partnership must have at least one general partner and one limited partner. General partners in a limited partnership, as in a general partnership, take an active hand in running the business and have the power to make decisions for the business. They also remain personally liable for any obligations of the partnership.
Limited Partners' Roles
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Limited partners, just like general partners, make a contribution to the business and have a stake in the profits. However, limited partners don't take any sort of active role in the business; their "limited" role is typically to contribute capital and then receive their shares of the profits and losses. Consequently, the law links a limited partner's share of business liabilities to his capital contribution. For instance, if a plaintiff sues the limited partnership and wins, the limited partner may lose his stake in the business, but the plaintiff can't go further and seize the limited partner's assets.
Limited Partner Taxation
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Limited partners' profits and losses from the partnership receive the same taxation treatment as those of general partners'. However, because a limited partner doesn't involve himself in the business, he usually doesn't have to pay the self-employment tax required of a general partner unless he provides the limited partnership with an actual service.
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