The Difference Between General and Limited Partnerships

The two most common types of partnerships are general partnerships and limited partnerships. Depending on the type of business involved, one type of partnership may be a better option than the other.

General Partnerships

All it takes to form a general partnership is an agreement between two or more people to enter into business for profit.  There does not need to be a written agreement, and no state or local filings are required. This formation requirement is so simple that individuals may not even know they have created a general partnership.

In a general partnership, each partner is jointly and severally liable for the partnership’s liabilities, and, most importantly, an individual partner is personally liable for partnership liabilities.  That means each partner is liable for any debts of the partnership or of any partners on behalf of the business, and creditors or third parties can attempt to collect debts and liabilities by going after an individual partner’s personal assets. This makes the general partnership a particularly risky business form.

Limited Partnerships

To form a limited partnership, there must be a formal agreement and the required documents must be filed with the California Secretary of State’s office.  Limited partnerships are similar but distinct from general partnerships. In a limited partnership, there has to be at least one general partner and one limited partner.  The general partner faces the same liability risks described above – joint and several, and potentially personal liability.  Because of this, the general partner in a limited partnership is typically an entity with limited liability.  The limited partner has limited personal liability in most instances, with the limitation being the limited partner’s investment in the partnership.