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.
While the general partner wields most of the power, they also bear the lion’s share of the liability. A limited partner’s liability, on the other hand, cannot exceed their financial contribution to the partnership. So, if a truck owned by a limited partnership accidentally injures someone, the damaged party could go after the general partner’s personal assets but could only go after a limited partner’s actual investment in the partnership.
As a result, a limited partnership offers two key advantages: It gives the general partner the freedom to run the business without interference, and it protects the limited partners if something goes wrong. Limited partners may choose to get more involved in a partnership's daily operations, but they do so at their own risk. In the eyes of the law, their involvement may make them a general partner and strip them of their limited liability.