Partnering Perspectives: General vs. Limited - Which Role Fits You?

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A General Partner is a partner in the business who plays an active role in the management and operation of the company. A Limited Partner is a silent partner in the business, who doesn’t aid in management or daily operations of the business.

The Details: General Partner

A General Partner is what you would consider a more ‘traditional’ partner. Meaning that they play an active role and manage the company. They can act on behalf of the company and, thus, have unlimited liability regarding financial deals of the partnership.

Unlimited Liability? What does that mean

If the partnership takes on a large amount of debt or financial liability, it has the possibility of passing through to all of the general partners (unless the business is a limited partnership - a story for another time).

The Details: Limited Partner

A Limited Partner, is considered a silent partner and as the name suggests they have a limited liability for the company’s liabilities and debt. The amount of liability the Limited Partner would acquire is based on how much capital they’ve contributed to the business.

Due to the limited liability aspect of the relationship, the Limited Partner is limited in their involvement in the day to day operations and are not allowed to participate in management meetings.

If a Limited Partner spends more than 500 hours in one year helping the partnership in its operations, they may be considered a General Partner.

Tax Consequences:

Both limited partnerships and general partnerships are pass-through entities, meaning that the income the business brings in will pass to the partner’s personal tax returns. In turn, the partnership itself does not pay the taxes, rather the partners are responsible for the payment.

However, there is one difference - Limited Partners do not pay self-employment tax on their share of the income. Limited Partners are not responsible for self employment taxes, because of their inactive roll in the company. They are not performing any management or operational duties, so the IRS does not consider a Limited Partners’ income as ‘earned income’.

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