Question

-What is the difference between a general partner and a limited partner? Give an

example of a situation in which a person would want to be a limited partner.

Answer 1

General partner
In the limited partnership consists of one at least general partner and one limited partner. General partners act as an owner of the partnership. General partners play an important role in the company’s daily operations, management controls, administration works and in any kind of decision-making process for the entity. They have unlimited liability relating to the financial dealing of a partnership, it means the general partner’s asset can be used against the settlement of the debt at the time of insolvency of the firm. They shared profits and losses as per predefined in the partnership deed.
Limited partner
The limited partner is also known as a silent partner in the partnership business because he has limited liability for debts that he has into the business. He has limited control over the management of the firm, and he does not participate in the management meeting but he has an interest in return on the investment which has been defined in the partnership agreement.
The following are the key differences between a limited partner and a general partner.
1. Limited liability- General partners have unlimited liability their assets can be used to recover the number of debts and liabilities of the firm whereas limited partners have limited liability against the debt recovery because they do not have any power like general partnership has
2. Control- General Partners are responsible for the daily operations activities of the business. They participate in the management meetings and decision-making process while limited partners do not participate in the management meetings and they do not have control over the operations of the firm.
3. Profit and loss- General partners shared the all profit and losses as per the partnership deed whereas the limited partners shared the profit and losses as per the amount invested by them in the business.
4. Structure- The complexity of general partners is very less in comparison to the limited partners' structure.
5. Income and Tax Considerations- General partners must be required paying self-employment taxes on the income received from the business whereas limited partners have not required to pay any self-employment taxes.

Example of a situation in which a person would want to be a limited partner

Mr John has a plan to a profitable construct the ten homes on the property land but John does not have money to construct the homes. Mr John has one friend Mr Smith who has money to invest in the land, and he has an interest in the limited partnership but he does not know how to develop the land. Mr John and Smith formed a limited partnership that allows smith to act as a limited partner and his liability also limited therefore smith contributes his money to the limited partnership. Mr John acts as a general partner, he is responsible for all construction relating to work and management. This scenario would allow John for the maximum liability and asset protection for John and Smith their venture.