A general partner is a stakeholder in a partnership-based business who actively engages in the day-to-day management and operations of the company.
Key Takeaways
- A general partner holds a managerial role and shares in the profits of a partnership business.
- General partners often include professionals like doctors and lawyers, who prefer working in a partnership to maintain their independence while benefiting from a larger organization.
- General partners can be held personally liable for the business’s debts.
Understanding the Role of a General Partner
A general partner has the authority to make decisions on behalf of the business without needing prior consent from other partners. Unlike a limited or silent partner, a general partner may face unlimited liability for the business’s debts.
General partners often bring essential skills and connections to the table, contributing positively to the business’s growth. The shared management responsibilities allow each partner to focus more on their respective duties, enhancing efficiency and proficiency.
One significant advantage of partnerships is tax efficiency. The IRS does not tax partnership profits at the corporate level. Instead, each partner reports their share of the profits as personal income and pays individual taxes accordingly.
The Liability Aspect
The flip side of being a general partner is the potential for personal liability. For instance, a medical malpractice lawsuit against one doctor could result in financial liability for all general partners in that medical practice. If the court awards damages to the plaintiff, all general partners might share the financial burden. In severe cases, the general partner with the most significant business investment could incur a larger portion of the penalty.
Should a general partner be called upon to fulfill the partnership’s debts, their personal assets could be at risk of liquidation.
Partnership vs. Limited Partnership: Crucial Differences
A partnership involves at least two individuals who unite to create a business entity, sharing the profits, expenses, and operational responsibilities. This setup is ideal for professionals in sectors like law, medicine, and creative industries who seek to augment their business scope while retaining their independence.
Partnerships allow pooling of investments and resources, enabling operations on a scale that might be challenging for an individual. Each partner becomes a general partner who shares in the operational costs and profits.
Limited Partnership
In a limited partnership, only one partner assumes the role of general partner, while others hold limited liability, restricted to their investment in the business. These limited partners act primarily as investors without active involvement in day-to-day operations.
Related Terms: Limited Partner, Silent Partner, Unlimited Liability, Liquidation, Internal Revenue Service, Malpractice Insurance.
