Who Are the Parties in a Limited Partnership?
By: Barry E. Haimo, Esq.
November 1, 2021
So you’ve decided that your new business venture will take the form of a limited partnership (LP). You want passive income, protection of your assets, and flexibility for all of the partners who want to be involved in the LP. There are two different types of partner roles in limited partnerships: a general partner and a limited partner.
It is common for business entities to serve as both a general and limited partner. And individual investors typically stick to the limited partner role. Let’s dive deeper into the responsibilities, duties, benefits, and drawbacks of each of these roles.
The Role of a General Partner
Florida requires general partners to be named when the limited partnership begins. These are partners that take an active role in the management of the company – in fact, they run all aspects of the business.
Due to their active role, they also must take on more liability than the limited partners. Specifically, they are 100 percent liable for the debts of the partnership. This is why business entities are more commonly general partners; they limit the liability exposure of the shareholders’ and officers of the general partner.
Examples of limited partnerships include:
- Royal Caribbean
- Wynn Resorts
Other examples of general partners in a limited partnership include:
- Co-owners of the business or larger investors who want to have a say in the limited partnership’s management decisions.
Usually limited partnerships have one or two general partners. This means that even though they run the entire company, general partners typically only make up a tiny percentage of the total ownership of a business – sometimes as low as 0.1 or 1 percent.
Now, you may have heard of “general partners” and general partnerships before: this is a separate business structure that is very similar to a limited partnership. (If you want to learn more about the advantages and disadvantages of a general partnership, click here.)
A general partnership consists only of general partners, and the managerial responsibilities, profits, losses, debts, and liability are divided equally among each general partner unless otherwise agreed (except for liability). Parties who would like to invest or be involved in a limited partnership also have the option to be limited partners. These partners should be considered when general partners are dividing profits and duties.
The Role of a Limited Partner
Which brings us to the duties and responsibilities of the limited partners (sometimes called “silent partners”). These are the remaining partners in the LP, and they have a lot more flexibility as to how much capital they would like to contribute to the LP. They do not participate at all in the business. They are passively involved, and in fact they are not permitted to participate or they will be characterized as general partners.
Limited partners all earn some sort of passive income through the limited partnership. But they do not receive dividends on behalf of the LP, and will not be personally liable for the debts of the LP. Think shareholders, but for a partnership.
Examples of a limited partner may include:
- A family member or friend who wants to invest, but not participate in the everyday operations of the limited partnership.
If limited partners want to dissolve their role in the partnership, it is possible for that partner to be bought out by another party. However, if general partners want to dissolve their active status in the limited partnership, they may have a harder time doing so, and may have to go to court to resolve the issue.
To learn more about how to properly structure a limited partnership, and use this business to protect your assets, get in touch with an experienced Florida business planning attorney today.
Originally published 01/12/2017. Updated 11/01/2021.
Barry E. Haimo, Esq.
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