Question

Your individual client is considering investing in a partnership. Please briefly explain the differences( rights, responsibilities, tax implications) between a general and limited partner.

Answer 1

Responsibility :

General partners have unlimited liabilities and responsibilities associated with the financial matter of the entity. General partner's assets also can be considered for the settlement of debt in case of insolvency .

Limited partners are only responsible and accountable for debts that they have in the business .

Rights :

General partners have all the rights to participate in management . Profit or loss of business shared on the basis of partnership agreement . They can be also paid by a way of a management fee.

Limited partners have limited rights and control. The have no control over the management but they have limited involvement in the entity, they are more focuses on return on investment .

Tax implication :

General partners pay self employment taxes because they are actively involved in the day to day regular business operations.

Limited partners who don't participate in the business operations don't pay self employment taxes.