Table of Contents Hide
- General Partner Definition
- How this works
- What Is the Liability of a General Partner in a Private Equity Firm?
- General Partner vs Limited Partner
- Who is a Limited Partner?
- The Significant Differences Between a Limited Partner and a General Partner
General Partner Definition
A general partner is one of two or more investors who jointly own a business and manage it on a day-to-day basis. A general partner basically has the authority to act on behalf of the company without the other partners’ knowledge or permission. In contrast to a limited or silent partner, the general partner may have unlimited liability for the business’s debts. So in the course of this article, besides getting to know the basics of who a general partner is, we will go through the following; General Partner Agreement, Liability and the differences between a general partner and limited partner (General partner vs Limited Partner)
How this works
First off, a partnership is any business organization formed by at least two people who agree to establish a company and split its expenses and profits.
Legal, medical, and creative professionals who prefer to be their own bosses but want to expand their business reach often tend to search for partnership arrangements. A partnership also provides a pool of investment for building and maintaining a business on a larger scale than a single person’s resources.
Consequently, under the terms of the partnership agreement, each professional becomes a general partner. They share the costs and responsibilities of running the business, as well as profits if it is successful.
Oftentimes, these partners need to bring a couple of things to the table for the growth of the business. This could be in form of knowledge or skills as well as contacts and clients.
General partnerships are only made up of general partners. This means that all partners are jointly and severally accountable for the activities of the partnership. In other words, a consumer can sue not just the partnership for its commercial assets, but also all of the partners for their personal assets. General partners are liable indefinitely. They could lose their company as well as all of their personal possessions.
This was the primary rationale for the creation of LL partnerships. Tons of people wanted to start a business but did not want the liability of being a partner in a partnership. Although, there must be at least one general partner in a limited liability partnership. As with a general partnership, this partner carries unlimited liability. The remaining partners may be limited partners.
What Is the Liability of a General Partner in a Private Equity Firm?
A general partner basically gets compensation for overseeing the day-to-day operations of the business. The rules also apply when they make legally enforceable decisions. This partner is personally accountable for all legal proceedings and business debts. However, if a general partner is unable to repay a creditor’s debt, the creditor may seek payment from another partner.
Furthermore, this partner is in charge of making all decisions about the operations of the business. In addition, they perform additional special tasks. For example, the GP must oversee the company’s portfolio, which includes all monies invested by LPs.
In layman’s words, the GP is in charge of the company’s administration, management, and operation.
As a result, in the hierarchy of responsibilities, raising funds comes first, followed by managing the day-to-day activities of the firm. These day-to-day operations may include the following;
- Discovering investment opportunities,
- Maximizing investment value, and
- Liquidation of investments so that distributions to LPs can be delivered.
For private equity funds, their primary goal is to manage the firm for the benefit of the LPs who have their investments in it and to act in their best interests
A general partner may be held personally liable for the partnership’s liabilities. A patient, for example, may sue a doctor for medical misconduct. But in certain situations, the client also has the right to sue all of the general partners in the firm.
If the court rules in favor of the client, all of the general partners will be held financially liable. In fact, the GP with the highest investment in the business may suffer a greater share of the penalty than the partner at fault.
If a general partner is ever at obligation to fulfill the financial liabilities of the partnership, the court may liquidate his or her personal assets.
On the other hand, in the event of a limited partnership, only one person becomes the general partner, while the others have limited liability. In other words, their liability for debts is limited to the amount they put in the business.
General Partner vs Limited Partner
The distinction between the two (general partner vs limited partner) is that the former owns the partnership, whereas the latter is a silent partner in the business. A general partner is a partnership’s owner. He/she is often either a managing partner or actively a part of the company’s day-to-day operations. They have the authority to act on the firm’s behalf.
Furthermore, while a general partner has significant obligations and duties in the partnership, they also have limitless liability over the business’s financial actions.
In other words, if the partnership incurs a significant amount of financial debt or liability, the general partners carry full responsibility. The only exception is if the company takes a different route.
Who is a Limited Partner?
A limited partner, also known as a silent partner, is only liable for a portion of the company’s liabilities and debts. In contrast to a GP, the amount of responsibility a silent partner acquires is dependent on the amount of capital they provide to the business. In addition to having limited liabilities, the partner has limited duties for the company’s day-to-day operations. These restrictions are solely dependent on the number of shares the silent partner owns.
Silent partners hardly take part in the company’s day-to-day operations. They do not also attend management meetings. However, if a silent partner contributes more than 500 hours to the partnership’s operations in a calendar year, they may become a general partner.
The Significant Differences Between a Limited Partner and a General Partner
- In the event of a company’s bankruptcy, the assets of the GP may become a means to pay debts. In contrast to general partners, limited partners have limited liability. A lawsuit can also be initiated against GPs for the company’s debts. But because silent partners do not have the same authority as general partners, they do not have to go through these.
- Silent partners do not have complete control over operations and management; rather, they have minimal control, whereas GPs have complete control over the entities’ business operations, management, and other decision-making.
- Unless otherwise stated in the agreement, all profits and losses are shared equally by the general partners. The silent partners receive a profit and loss share on the basis of their investments or the terms of the agreements.
- The complexity of the general partners’ structure is very low when compared to the complexity of the limited partners’ structure.
- Unless otherwise stated in the agreement, the general partner can be viewed as an equal owner of the entity. The partnership agreement specifies the ownership of the silent partners.
- Silent partners have no authority to make decisions or enter into contracts on behalf of the firm. GPs, on the other hand, have the authority to enter into legal contracts or any type of arrangement on behalf of the corporation.
The table below will help you get a clearer view of the distinctions above.
|Basis of Comparison||Limited Partners||General Partners|
|Liability||Unless otherwise stipulated in the agreement, limited partners are liable to the extent of their investment.||In the event of bankruptcy, general partners’ obligations are infinite, and their assets might be used to pay off obligations.|
|Ownership||The partnership agreement specifies who owns what.||Unless otherwise stipulated in the agreement, General Partners have equal ownership.|
|Control||In contrast to GPs, a silent partner has very less power.||The GP is in charge of the day-to-day operations and management of the company.|
|Profits / Loss||Profit and loss are divided based on the partner’s investment;|
Or otherwise, as per the terms of the legal agreement.
|Except as otherwise established in the agreement, GPs split profits and losses equally.|
|Structure||Structure is often more complex||The structure for this is pretty simple.|
|Documentation||The limited partnership necessitates additional paperwork.||This form of business requires less paperwork.|
|Participation||In a limited partnership, there is less involvement in day-to-day business activities.||General partners play a significant role in business operations and management.|
- A GP is a business owner who shares in the company’s profits.
- They could include doctors, lawyers, or other professionals who are in partnership in order to maintain independence while being a part of a larger enterprise.
- They may be held personally accountable for the company’s debts.