General and Limited Partnerships – Know the Differences

General and Limited Partnerships – Know the Differences

Typically, partnerships can be placed into two categories–general partnerships and limited partnerships.

In a partnership, all profits and losses are passed through to the partners according to their percentage of ownership (in the absence of a special allocation), even if the profits remain in the business to fund continuing operation or expansion.

Beyond this basic principle, partnership tax law is a complex subject to understand and is fraught with traps for the unwary.

Unless limited by the partnership agreement, each partner has full managerial control over the partnership. In addition, each partner has unlimited personal liability for the debts and obligations of the partnership.

To form a general partnership, prepare a written partnership agreement to set forth the ownership and responsibilities of the partners.

Unless otherwise stated, any new partners will have the same rights, responsibilities, and liabilities of the original partners.

Advantages

General partnerships have higher maintenance costs than a sole proprietorship because they must track assets and liabilities as well as income and expenses. However, they have lower maintenance costs than a corporation because they are not required to follow the same formalities as corporations.

In addition, the business can continue after the disability or death of a partner if there are more than two partners.

Disadvantages

A general partnership is potentially a dangerous form of business entity because each partner is jointly and severally liable (meaning together and separately liable) for the debts of the partnership and the acts of other partners within the scope of the business.

It is often hard to get rid of a disgruntled partner.

A carefully drafted partnership agreement prepared by an attorney can help you avoid the disadvantages inherent in partnerships.

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