A general partner is a partner in an unincorporated business who has unlimited liability. General partners participate in the operations of the business on a day to day basis and make decisions about management and administration. A business may be established with a group of general partners, and it is also possible to add general partners to a business later on, as for example if a business wants to expand and needs an infusion of new capital.
In a general partnership, all of the business partners are general partners. They share responsibilities, including legal liability, and actions taken by one partner have an effect on everyone. For example, if a general partner uses company funds to purchase an outdated product which does not sell, putting the company in debt, all of the partners are responsible for resolving the debt. Likewise, all of the partners also share in profits from the business.
Limited partnerships involve at least one general partner and one limited partner. Limited partners invest so that they have a share in the business but they are not involved in management decisions, although they may be able to vote general partners out. If they do become involved in the administration of the business, they become general partners and also share legal liability. Limited partners do not have legal liability and do receive a share of the profits in exchange for their investment in the business.
The share which a partner receives is based on the percentage of that partner's investment. In a two person business where both partners contributed equally, for example, profits would be split 50-50. On the other hand, a general partner might have have a 60% share while two other partners holds 30% and 10% respectively, which would change the distribution of the profits from the business. The terms are determined when the partnership is established or modified to accommodate a leaving or entering partner.
Agreeing to be a general partner involves accepting significant responsibility. Liability for debts can trail general partners even after their businesses dissolve. It is important to go into business with people who are trusted and to establish limits to avoid situations in which general partners make decisions which impact the whole with consultation or approval. Some people may prefer to be limited partners, taking the investment risk to obtain a share in a business without assuming the liability, even though they may make less in the long term.
