General vs. Limited Partnerships

There are two types of partnerships: general partnerships and limited partnerships (LPs). In a general partnership, each partner can incur obligations on behalf of the partnership, and each assumes

unlimited liability for the partnership's debts. For example, if the partnership owns a truck, and the truck strikes and injures a pedestrian, each partner is personally liable for any damages or judgments.

This unlimited liability risk makes limited partnerships an attractive alternative to general partnerships. In an LP, there is usually just one general partner (although there can be more). The other partners are called “limited partners.” The general partner has full management responsibility runs the day-to-day operations of the business. A limited partner cannot incur obligations on behalf of the partnership and does not participate in the firm's daily operations or management. In fact, a limited partner's role usually involves nothing more than making an initial capital investment in exchange for a share of the firm's profits.