Although many people going into business form a sole proprietorship, this is not always possible or desirable. A limited partnership can be a good alternative to a sole proprietorship or a general partnership. A limited partnership can have some of the advantages of a sole proprietorship. It can also have some of the disadvantages of a general partnership.
A limited partnership is defined by two or more people forming a business relationship, with at least one person serving as the general partner and at least one other person serving as the limited partner. A limited partnership differs from a general partnership in that a general partnership treats all partners equally--with equal say in making the decisions of the company and equal liability. With a limited partnership, the general partner has the majority of decision making power and takes on the bulk of the liability. The limited partner is limited in decision-making. In return, she is only liable for her investment in the partnership.
Advantages for the Limited Partner
The limited partner enjoys a number of benefits with a limited partnership. For a successful company, she can share in the profits with a minimum of effort. For a failed company, she is shielded from the majority of the liability and other legal issues which may arise.
Advantages for the General Partner
The general partner also gains benefits from a limited partnership. A limited partnership can provide a much needed source of capital for a company. The general partner also retains the majority of control over the day-to-day operations of the company, as well as making decisions for the future direction of the company.
Disadvantages for the Limited Partner
Because the limited partner is shielded from the bulk of liability, she is also limited in the role she can play in the running of the company. If she becomes active, she runs the risk of taking on the liability of a general partner. It can also be difficult for a limited partner to withdraw her investment in a limited partnership.
Disadvantages for the General Partner
In the event of company failure or other legal problems, the general partner is fully liable. Also, if the general partner wants to transfer his role in the company, or add a new partner, the limited partner can veto his choice. This is because both limited and general partners have the right of first refusal in cases of transfer.