Question

You have been invited to become a member of a partnership. What are some of the considerations you need to assess in making a decision to become a general or limited partner?

Answer 1

Limited Partner

Under limited partnership structure there will be one or more limited or general partners. Under this form of partnership, at least one person needs to be a general partner. The abbreviation of the term-limited partners is LP. The limited partners are only responsible and accountable for debts that they have into the business. Limited partners have limited control, they have no control over the management but have limited involvement in the entity; they have more focus on return on the investment. The income of limited partners is the return on investment which has been predefined in the agreement. In limited partnerships, the partners need a legally binding partnership agreement.

Advantages of Becoming a Limited Partner

Below are some advantages to becoming a limited partner:

• A limited partner can contribute financially to the business in exchange for a percentage of the partnership's profits.
• A limited partner cannot incur the debts or obligations of the partnership in excess of the amount of capital invested in the business.
• A limited partner need not participate in the daily operations of the business or in management meetings.
• If a limited partner works in excess of 500 hours in a given year, he or she may be deemed a general partner. This can be an advantage for a limited partner who wishes to have more of a say in the company's growth and development.

Disadvantages of Becoming a Limited Partner

• While it may be advantageous for you not to spend additional time participating in the daily operations of the business, it may also be disadvantageous, as you generally cannot make any important decisions regarding the company's growth.
• A limited partner can invest a lot of money but still have no say in the business decisions.
• While working in excess of 500 hours/year can deem someone a general partner, the disadvantage will be the unlimited liability that a general partner incurs. Further, a limited partner may also be deemed a general partner in other circumstances as well. If, for example, a creditor can prove that the limited partner took action in the dealings of the company, then the partner may be deemed a general partner and thereby liable for such debts and obligations.
• A limited partner may lose his or her financial investment in the partnership.

General Partner

The general partners have unlimited liability associated with the financial matter of the entity, this means the general partner’s asset also considered for settlement of the debt in case of insolvency of the entity. We can say that the general partner is the owner of the partnership firm. A general partner can act on behalf of the entity and general partners play an important role in the entity’s operations, management control, administration, and any kind decision making for the entity, sometimes acts as a managing partner.

General partners have all the rights to participate in the management. The profits and losses in the general partnership will be shared based on the partnership agreement; they can also be paid by way of a management fee. A management fee means the percentage of the total amount of the fund’s capital. This percentage is fixed. The fee range could be between 1% to 2% annually of the capital committed. Some partnerships elect a company board to control and manage the entity.

Under this structure general partners have the option of making decisions and resolve the disagreements by voting with the majority rule, this can be called a dispute resolution process. No outside party can join the partnership without the full consent of existing partners or unless it is mentioned in the partnership agreement. Less paperwork requires in the partnership in comparison to limited liability partnership (LLP). They also have full control to manage the portfolio of the company.

What Is Included in the Partnership Terms?

General partners will share their company's losses and profits equally unless it's stated otherwise in the partnership agreement. Extra partnership terms often have provisions about how the partnership shares that are remaining are divided when one partner leaves the business. The state partnership law is applicable when general partners don't spell out clear terms in the partnership agreement. All rules for the partnership must be stated in this agreement.

Liability for General Partners

Usually, a general partner gets paid for controlling the daily operations of the business and making decisions that are legally binding. This partner is liable personally for legal proceedings and business debts. If a general partner can't pay off a creditor's debt, the creditor can collect from another partner.