General Partnership vs Limited Partnership: What’s the Difference?

For entrepreneurs who would prefer to share ownership and responsibilities of businesses, partnerships are a common structure. Yet, there is more than one approach to this practice. It’s important to understand the distinction between general partner vs limited partner models before jumping into formation.

We’ve created this article to provide entrepreneurs with insights into the key differences between general partnerships and limited partnerships, exploring aspects including liability, management control, formation processes, and taxation. Importantly, we’ve taken a global perspective, as these types of partnerships aren’t limited to specific countries or jurisdictions.

Overview of Business Partnerships

Generally speaking, a business partnership refers to when two or more individuals or entities make an agreement to operate a business together; sharing profits, losses, and management obligations. They are usually structured in such a way that each partner equally shares profits and responsibilities.

There are two main partnership types: general partnership and limited partnership. Each has its own advantages, strategic uses, and challenges. It’s important to note that the fine details and obligations of a partnership structure vary in terms of legal requirements, regulatory reporting standards, and taxation, depending on the global jurisdiction in which they’re formed. Nevertheless, the distinctions are broadly applicable wherever in the world a partnership is formed.

What Is a General Partnership?

General partnerships are relatively simple forms of partnership, usually occurring when two or more partners agree to conduct business together. While these can be formed verbally, it is more typical to register the partnership with local authorities, formalizing the relationship. 

In the majority of cases, each of the general partners will share equal responsibility for managing the business, making decisions jointly. Indeed, in this structure, general partners usually manage the business directly, rather than delegating leadership. Perhaps most importantly, general partnership also means that all partners hold equal liability for debts and legal actions, sometimes resulting in risks to their personal assets.

In terms of taxation, entities are usually treated as pass-through entities. This means that profits and losses are reported by partners on an individual basis, rather than being subject to corporation taxes.

What Is a Limited Partnership?

Limited partnerships are distinct from their general counterparts in that not all partners have equal roles and responsibilities. In this structure, there will usually be at least one general partner (GP) and a number of limited partners (LPs). GPs will assume full responsibility for active management of the business, usually holding unlimited legal and financial liability. What is a limited partner? LPs purely contribute capital to the fund and take on limited liability alongside having no management authority. 

The division of the risks and responsibilities in these roles is often reflected in the percentage of profits received, with GPs sometimes also gaining management fees. This also makes the structure a popular choice in investment and real estate ventures, as it presents passive limited liability investment opportunities that benefit from a single management approach. 

Taxation here is often treated as pass-through, though in some jurisdictions there are additional filing requirements and reporting regulations.

Key Differences Between General and Limited Partnerships

The main differences in the two approaches to partnership revolve around:

• Liability – GPs are personally liable for business debts and legal issues, which can put their personal assets at risk if the partnership faces difficulties. LPs’ risk exposure only reflects the amount they invest, their personal assets are generally protected. 
• Management – In general partnerships, all partners are equally responsible for managing the business and making operational decisions. In limited partnership, only the GP is involved in management, while LPs take a passive role.
• Legal formation – General partnerships can often be formed informally or through verbal agreements. Limited partnerships usually require formal registration with a government body.
• Continuity and exit – General partnerships can dissolve if a partner decides to leave or dies. The formal structure of limited partnerships separates the firm from individual partners, resulting in more continuity and stricter exit procedures.

Advantages and Disadvantages of Each Structure

General partnerships

The pros of general partnerships include a simplicity or formation and operation, requiring minimal paperwork. Each partner also maintains full control of operations. However, the unlimited exposure to personal liability is an undisputed drawback, with risks shared between all partners even if only one party causes issues. 

Limited partnerships

The key pro in limited partnerships is the limited liability risks partners face. The structure is also flexible enough to support investment models with multiple passive participants. On the downside, limited partnerships are more complex and costly to establish, alongside GPs still facing full personal liability.

Legal and Tax Considerations

There are a few similarities and differences between the structures in legal and tax areas. Firstly, both usually require some sort of formation agreement. While general partnerships can be formed with a verbal contract, it is advisable to formalize rights and responsibilities in writing to avoid disputes. The difference here being limited partnerships are required to be officially registered with authorities alongside arranging formal partnership agreements.

In terms of taxation, in most instances both types of partnership are treated as pass-through entities, in that the partnership doesn’t pay tax with profits and losses passing through to individual partners to report on their personal tax returns.

It’s important to understand, however, that LPs and GPs can be treated differently under regulatory and filing laws depending on the jurisdiction they report to. Some countries may have more complex tax disclosure requirements or place limits on who can form partnerships in specific industries. This makes it particularly vital to gain professional legal and tax advice from experienced third-party consultants—including relevant specializations like private equity consulting—to identify potential challenges at the earliest opportunity.

Use Cases and Examples

General partnerships 

General partnerships are most often suited to small businesses, family-run firms, and professional service providers. These are models in which partners are typically actively involved in operations. For instance, two friends might make a formal or informal agreement to open a food truck together, sharing operational responsibilities, risks, and profits equally.

Limited partnerships 

Limited partnerships are commonly present in situations where passive investment managed by a single active partner is practical, such as real estate investment groups, private equity funds, and venture capital structures. For example, in a real estate investment group, a number of LPs will contribute funds as capital, while the general partner makes decisions on how to utilize the capital in property acquisitions and leasing. Private equity in healthcare, too, can benefit from single strategic decision-makers supported by significant capital provision.

Global Relevance of Partnership Structures

Although we’ve used universal definitions of partnerships in this article, the specific rules relating to these structures will vary between countries. Every jurisdiction features unique legal requirements regarding registration processes and governance requirements. Not to mention that taxation can involve nuances depending on regional laws. Indeed, many entrepreneurs seek to form in specific international jurisdictions to leverage favorable regulatory or tax terms. Ascot International provides global incorporation and partnership advisory services, guiding entrepreneurs through arranging formation and operational strategies that are best suited to their specific needs.

FAQs

What is the main difference between a general partner and a limited partner?

The main differences involve liability and control. General partners bear full control and liability, while limited partners have limited liability and no control.

Can a limited partner lose more than they invest?

No, limited partners’ liability is capped at their investment, provided they don’t engage in management.

Do general partnerships require a written agreement?

Not always, as a verbal agreement is sufficient in some jurisdictions, though written contracts are strongly advised.

Can one person be both a general and a limited partner?

Yes, some structures allow for individuals to hold both roles. This is dependent on how the partnership is structured, though.

Which partnership structure is better for investors?

Limited partnerships are often considered more attractive to passive investors. This is due to the limited liability protections and clearly defined roles this approach provides.

References

IRS. (2025, June 10). Tax information for partnerships. IRS. https://www.irs.gov/businesses/partnerships

Hayes, A. (2022, March 28). Real Estate Limited Partnership (RELP): Definition and Roles. Investopedia. https://www.investopedia.com/terms/r/realestatelimitedpartnership.asp

UK Government. (2025). Set up a business partnership. UK Government. https://www.gov.uk/set-up-business-partnership