Generally, “partnership” implies General Partnership, as viewed by the vast majority of people. However, in business world, another form of partnership exists, namely Limited Partnership (LP). In short, a general partnership applicable when both partners have administrative, management and operation control on the business. On the other hand, when the partnership business is operated, administered and managed by only the single partner (general partner) and the other partner (limited partner) has no administrative, management or operational control (except contributing capital only), a limited partnership comes into place. A more specific format of partnership, which is named Limited Liability Partnership (LLP) comes in place only for lawyers or CPAs, where one partner is not generally liable for the negligence, wrongdoing, or misconduct of other partner.
Four major characteristics distinguish a limited partnership from a general partnership:
- A limited partnership is operated by a single “general partner” with unlimited liability, supported by other “limited partners”.
- The “limited partners” contribute capital but cannot be involved in the company’s management, administration or decision making.
- The single “general partner” gets a bigger share of the earnings in exchange for increased contributions and risk.
- The liability of the limited partners is capped in proportion with the capital contribution