A General Partner usually owns the business partially and takes care of the routine administration of the business. General Partner gets a predetermined profit-share.
A general partner is a part owner of a business who enters into a partnership with other owners of the business. He is entrusted with day-to-day duties of a business and holds a level of authority. He is also entitled to a share of the profits that the business generates. Furthermore, a general partner is also subject to unlimited liability of the business’s debts.
In the absence of the other partners, a general partner can easily take decisions and exercise control. Interestingly, the partners are required to share reports of their share of the profits and losses in their tax return. However, the partnership in itself is non-taxable.
As a general partner is an active partner of a business and is responsible for unlimited liabilities as well as profits, a limited partner is quite the opposite. A limited partner is also known as a silent partner as they have no role in the day-to-day operations of the business. They also do not have any authority or decision making power.
Additionally, the profits and liabilities of a limited partner are limited to the extent of his investment. The IRS usually considers the income of a limited partner from the business as passive income. However, if a limited partner spends over 500 hours annually in helping the partnership in its daily operations, they can be considered as a general partner.
A general partnership is any partnership where two or more people invest and actively participate in the daily operations of the business and divide the profits. For example, let’s assume that Mr. X has started a new business and he raises capital with the help of Mr. Y who agrees to a fair share of profit and bears unlimited liability. Here, Mr. Y is a general partner and has the authority to make decisions.
In practical sense, here are the most commonly formed general partnerships in businesses:
Partners in a general partnership share the liabilities unlike limited partnerships. This means that each general partner will be responsible for unlimited liability which can also result in seizing of assets if the business fails.
It also means that every general partner agrees to the liability clause and understands that they are equally responsible for the actions of the other partners and by extension the employees too.
A general partner is easier to work with and can put in place many ideas. People who have a good understanding with each other mostly end up becoming general partners for a business as it offers them room for more flexibility. Even though the unlimited liability clause stands, this type of partnership works well as all the general partners understand the consequences and put in all their effort.