General Partnership, Limited Partnership and Limited Liability Partnership: Formation, Governance and Liabilities
1. What Is The Difference Between a General Partnership, Limited Partnership and Limited Liability Partnership?
General Partnership vs Limited Partnership vs Limited Liability Partnership
A General Partnership involves partners sharing equal responsibility and liability.
Limited Partnerships feature general partners with unlimited liability and limited partners with liability capped at their investment.
Limited Liability Partnerships offer all partners protection from personal liability for the actions of other partners.
2. Business Partnerships: A Comprehensive Legal Overview
Partnerships stand out as a fundamental arrangement for entrepreneurs who wish to collaborate to achieve common goals.1 Partnerships are one of the oldest forms of business organization and remain fundamental in business law.
A partnership generally refers to a voluntary association of two or more persons who co-own a business for profit. Unlike corporations, partnerships are usually simpler in form and governed largely by default rules that partners can modify by agreement.
In the United States, partnership law has been codified in uniform acts to promote consistency across states. The primary statutes are the Uniform Partnership Act of 1914 (UPA) and its successor, the Revised Uniform Partnership Act (RUPA) first promulgated in 1994 (with 1997 and later amendments).
These acts supply default rules for general partnerships and, in RUPA’s case, also address limited liability partnerships.
Limited partnerships are covered by separate uniform acts (the Uniform Limited Partnership Acts of 1916, 1976, 1985, and 2001), but for our purposes we will focus on general principles without diving into state-specific variations.
While the concept of partnership is straightforward, the legal differences between different types of partnerships—General Partnerships, Limited Partnerships, and Limited Liability Partnerships (LLP)—are essential for business owners to understand.
This post aims to shed light on these variations, focusing on their definitions, formations, liability implications, tax considerations, and dissolution processes.
2.1 General Partnerships: The Basics
A General Partnership is the simplest and most straightforward type of partnership. It is formed automatically when two or more individuals engage in a business for profit, without the need for formal paperwork.
Under the UPA (1914), a general partnership is defined as “an association of two or more persons to carry on as co-owners a business for profit”.
This definition explains the aggregate nature of a UPA partnership – essentially a collection of individuals doing business together, rather than a distinct legal entity separate from its owners.
Consequently, under the UPA, the partnership’s existence is closely tied to its partners: if any partner leaves, the partnership is typically considered dissolved (ended) by that change.
RUPA (1997), by contrast, explicitly adopts an entity theory of partnership. RUPA Section 201 states that “a partnership is an entity distinct from its partners”, reversing the aggregate approach of the UPA.
In practical terms, a RUPA partnership has a legal existence separate from the partners, which means the partnership can continue in business even as its membership changes
Therefore, UPA treats a partnership as a legal aggregate of the partners, whereas RUPA treats a partnership as a legal entity.
2.1.1 Formation and Operation of General Partnerships
Forming a General Partnership typically does not require filing with the corporate authority. It can arise from as simple an act as starting a business endeavour with another person.
However, while the ease of formation is a clear advantage, partners often opt to formalise their arrangement through a written partnership agreement.
This document outlines the roles, responsibilities, and profit-sharing ratios among partners and can serve as a valuable reference in resolving disputes.
2.1.2 Liability Implications of General Partnerships
In a General Partnership, all partners share unlimited personal liability for the debts and obligations of the business.
This means that if the business cannot meet its liabilities, creditors can pursue the personal assets of any or all partners.
The joint and several liability aspects highlight the need for mutual trust and due diligence among partners.
2.1.3 Tax Considerations of General Partnerships
General Partnerships enjoy pass-through taxation, meaning the business itself is not taxed on its profits.
Instead, profits and losses are passed through to the individual partners, who report them on their personal tax returns.
This avoids the double taxation faced by companies but requires partners to be mindful of tax planning.
2.2 Limited Partnerships: Balancing Involvement with Protection
Limited Partnerships (LPs) introduce the concept of limited liability for certain partners, distinguishing between General Partners, who manage the business and have full liability, and Limited Partners, who contribute capital and have limited liability.
The governing law for LPs historically comes from uniform acts distinct from the UPA. The ULPA was first promulgated in 1916, then substantially revised in 1976 (RULPA 1976) with amendments in 1985, and then superseded by a new ULPA in 2001.
These uniform acts have been adopted in some form by all states, providing the framework for formation, operation, and dissolution of limited partnerships.
A key point is that earlier versions of ULPA (1916, 1976/85) were linked to the general partnership law – meaning that in matters not specifically addressed, the general partnership statute (UPA) would apply (for example, RULPA 1976 had a provision that the UPA governs in any case not provided for, effectively incorporating general partnership rules for agency, fiduciary duties of general partners, etc., to the extent consistent).2
The ULPA (2001), however, is a stand-alone act – it provides a self-contained set of rules for limited partnerships, not relying on cross-reference to UPA/RUPA.
ULPA 2001 also introduced some modernizations like the Limited Liability Limited Partnership (LLLP) variation (which we’ll touch on later).
In general, under any of these acts, a limited partnership is considered a separate legal entity once properly formed (especially under modern statutes, the entity theory is clear).
ULPA (2001) explicitly states an LP is an entity distinct from its partners (akin to RUPA’s entity approach).
Even under older acts, because an LP required a filing with the state, it had a more formal existence than a GP, and it was treated more as an entity for many purposes (for example, an LP can own property in its name, sue and be sued in its name, etc., similar to a corporation or LLC).
To summarize the concept: an LP is a partnership where management and full liability are borne by one or more general partners, and the limited partners are essentially investors with no personal liability (beyond their capital contributions) and with no role in day-to-day management.
2.2.1 Formation and Structure of Limited Partnerships
Creating an LP requires more formal steps than a General Partnership, typically involving filing a certificate of limited partnership with the state.3
The LP must have at least one General Partner and one Limited Partner.
The limited partnership agreement, detailing the LP’s operation and the distribution of profits and losses, is critical to its function.
2.2.2 Liability and Management in Limited Partnerships
The main attraction of an LP is the limited liability protection it offers Limited Partners.
These partners are only liable for the debts and obligations of the business up to the amount of their investment.
However, they must refrain from taking an active role in the business’s management to maintain this protection. In contrast, General Partners retain full liability.
2.2.3 Tax Considerations in Limited Partnerships
Like General Partnerships, LPs benefit from pass-through taxation, providing an advantage over traditional companies by avoiding double taxation.
2.3. Limited Liability Partnerships: The Hybrid Model
Limited Liability Partnerships (LLP) represent a hybrid model, combining features of General Partnerships and LPs, ideally suited for professional groups such as lawyers, accountants, and consultants.
An LLP is essentially a general partnership that has elected to register for limited liability status under applicable law. Unlike an LP, an LLP does not have two classes of partners; it may be the very same partners who would be in a GP, but they have filed a statement with the state to shield themselves from personal liability for the partnership’s obligations.
In other words, an LLP remains a partnership (all partners can take part in management), but it provides a liability shield similar to that of a corporation or LLC for all the partners.
Under RUPA and the various state statutes, an LLP is defined as a partnership that has filed a Statement of Qualification (sometimes called a Registration) to become an LLP
For example, RUPA (1997) s1001 provides that a partnership may become an LLP by filing a statement containing the name of the partnership, the intent to be an LLP, and certain required information (like principal office address, perhaps).
Once filed, the partnership is known as “XYZ LLP” and each partner gains limited liability protection as described in RUPA s306(c): a debt, obligation, or other liability of the partnership incurred while it is an LLP is solely the debt of the partnership, and a partner is not personally liable for it solely by reason of being a partner.
The partnership itself remains liable fully (so this is entity shielding but not entity elimination of liability), but the partners’ personal assets are not reachable for those partnership debts.
It is important to note that an LLP is not a separate type of entity; it is the same partnership that existed before, only with a different liability posture.
You cannot “form an LLP” out of thin air – you form a general partnership first (by agreement or operation of law) and then elect LLP status for that partnership.
Some states allow limited partnerships to also register as LLPs (yielding a “Limited Liability Limited Partnership” or LLLP as mentioned earlier), but colloquially “LLP” usually refers to a registered general partnership.
The uniform acts (RUPA) include provisions for LLPs; the original UPA (1914) did not, but virtually all states amended their partnership statutes in the 1990s to allow LLP registration.4
The concept emerged in the early 1990s (Texas was first in 1991) primarily to protect professionals (like partners in large law firms or accounting firms) from malpractice claims against the partnership that could bankrupt innocent partners.
By the late 1990s, LLP statutes were widespread, and the Uniform Partnership Act was updated to incorporate LLPs.
2.3.1 Formation and Legal Structure of Limited Liability Partnerships
Forming an LLP typically requires registering with the authorities, along with filing an annual report to maintain the status.
The partnership agreement is crucial for delineating the structure and operational guidelines of the LLP.
2.3.2 Liability Protection in Limited Liability Partnerships
A key feature of LLPs is that they offer all partners protection from personal liability for the actions of their partners.
This means a partner is not personally liable for another partner’s negligence or malpractice, though they remain liable for their own actions and the business’s debts.
2.3.3 Taxation in Limited Liability Partnerships
LLPs also enjoy pass-through taxation, allowing profits to be taxed only once as personal income of the partners, which simplifies tax filing and can lead to tax savings.
3. General Partnership vs Limited Partnership vs Limited Liability Partnership
| Feature | General Partnership | Limited Partnership (LP) | Limited Liability Partnership (LLP) |
|---|---|---|---|
| Formation | Automatically with business activity | Requires state filing, usually a certificate of limited partnership | Requires state registration and often an annual report |
| Liability | Unlimited personal liability for all partners | General partners have unlimited liability; limited partners have liability limited to their investment | Limited personal liability for all partners for the actions of other partners |
| Management | All partners typically involved in management | General partners manage the business; limited partners are not involved in management | Partners have equal rights in management, unless otherwise agreed in the partnership agreement |
| Taxation | Pass-through taxation (partner reports their income on their personal tax returns) | Pass-through taxation (partner reports their income on their personal tax returns) | Pass-through taxation (partner reports their income on their personal tax returns) |
| Investment | Partners contribute capital, labour, or skill | Limited partners contribute capital, allowing them to be passive investors | Similar to general partnerships, but structure may attract professionals seeking liability protection |
| Flexibility and Formality | High flexibility, minimal formal requirements | More formal structure with specific roles and responsibilities | More formalities than general partnerships but offers greater protection and flexibility than LPs |
| Dissolution | Can dissolve upon a partner’s exit unless otherwise agreed | Requires following the process outlined in the partnership agreement or corporate law | Similar to LPs, dissolution as per the partnership agreement or corporate law |
4. Which Laws Regulate Partnerships In The UK And USA?
In the UK, partnerships are primarily regulated by the Partnership Act 1890 and the Limited Partnerships Act 1907, with Limited Liability Partnerships governed by the Limited Liability Partnerships Act 2000.
These laws outline the formation, operation, and dissolution of partnerships.
In the USA, partnership laws vary by state but are generally based on the Uniform Partnership Act (UPA) for General Partnerships and the Revised Uniform Limited Partnership Act (RULPA) for Limited Partnerships.
Limited Liability Partnerships (LLPs) are regulated by state-specific statutes that modify or extend these uniform acts.
5. How Can A Limited Partnership Be Converted Into An LLP?
Converting a Limited Partnership (LP) into a Limited Liability Partnership (LLP) involves several steps, largely dictated by business legislation where the partnership operates.
Generally, partners must agree to the conversion, often requiring a majority or unanimous vote depending on the partnership agreement or state regulations.
The process includes filing a conversion application or certificate with the relevant state authority, often accompanied by a fee.
This filing typically outlines the LP’s decision to convert, its agreement to operate as an LLP, and adherence to any additional legislation-specific requirements.
Upon approval, the LLP must update its partnership agreement and notify creditors, clients, and other relevant parties of its new status.
6. Can A Company Be A Partner In A Limited Partnership Or LLP?
A company can be a partner in both Limited Partnerships (LPs) and Limited Liability Partnerships (LLPs).
In an LP, a corporation can serve as a general or limited partner, contributing capital or expertise while participating in the partnership’s operations and profits.
Similarly, in an LLP, companies can become partners, providing the same flexibility for involvement and investment.
This arrangement allows businesses to leverage resources, share risks, and collaborate on ventures, enhancing their capacity to undertake large projects or expand their market presence.
7. Can Limited Partnership And LLP Issue Stocks Or Shares To Raise Capital?
Neither Limited Partnerships nor LLPs can issue stocks or shares in the same way companies do, as they are not structured as corporate entities.
However, Limited Partnerships can raise capital by adding new limited partners who contribute financially in exchange for a share of the profits.
Similarly, LLPs can admit new partners under the terms outlined in the partnership agreement, allowing for capital infusion.
These methods align with the partnership model, focusing on direct investment from partners rather than public share offerings.
8. Can A Limited Partnership And Limited Liability Partnership Own Property In Its Name?
Both Limited Partnerships and LLPs can own property in their names. When an LP or LLP acquires property, the title is held in the partnership’s name, rather than in the names of the individual partners.
This capability is integral to the entity’s function, allowing it to engage in activities, such as buying, selling, and holding property, that are necessary for its business operations.
Ownership in the partnership’s name simplifies management and transactions related to the property.
However, the implications for liability and tax treatment of property income or gains can vary between an LP and an LLP, reflecting their different structures, especially regarding the extent of partners’ liability.
9. How Does A Partner’s Death Affect A General Partnership, Limited Partnership And LLP?
In a General Partnership, a partner’s death typically dissolves the partnership unless the partnership agreement specifies otherwise, outlining procedures for continuation or buyout of the deceased partner’s interest.
In a Limited Partnership, the death of a limited partner does not dissolve the partnership; their interest passes to their heirs or beneficiaries, preserving the LP’s continuity.
The structure allows for the replacement or buyout of the deceased partner’s stake according to the partnership agreement.
Similarly, in a Limited Liability Partnership (LLP), a partner’s death does not lead to dissolution.
The partnership agreement usually includes provisions for dealing with such events, often allowing the LLP to continue operations while the deceased partner’s estate is compensated for their interest.
10. Dissolution of General Partnership, Limited Partnership and Limited Liability Partnership
The dissolution processes for these partnership types vary, with General Partnerships often dissolving upon a partner’s departure unless otherwise agreed.
LPs and LLPs have more structured processes, typically outlined in their formation documents.
Regardless of type, the dissolution involves settling debts, distributing remaining assets, and filing necessary paperwork with the state.
11. Conclusion: General Partnership vs Limited Partnership vs Limited Liability Partnership
Each form of partnership – GP, LP, and LLP – offers a unique blend of benefits and drawbacks shaped by the uniform statutory regimes of UPA, RUPA, and related acts.
Under the UPA (1914) model, the general partnership provides maximum flexibility and informality, but at the cost of exposing partners to personal liability and potential instability upon partner turnover
The Revised UPA (RUPA) modernized the general partnership by adopting an entity approach that enables continuity and by explicitly permitting the LLP form to shield partners from liability.
Limited partnerships, governed by their own uniform acts, carve out a space for passive investment in partnership enterprises by protecting limited partners from liability while centralizing management in general partners.
Limited liability partnerships, as enabled by RUPA and state amendments, represent the evolution of the general partnership – allowing partners to have the best of both worlds: active management participation and limited liability protection.
In summary, the General Partnership remains advantageous for its simplicity and egalitarian management, but it is viable mostly where participants can tolerate personal liability and a high degree of mutual trust.
The Limited Partnership is tailor-made for situations where a business needs investors – it imposes more formality but creates a clear framework for sharing profits with those investors without involving them in management or risking their personal assets.
The Limited Liability Partnership is a product of modern statutory innovation, well-suited for collegial enterprises like professional firms or any general partnership that wants to eliminate the historic penalty of personal liability.
When choosing the appropriate partnership structure, one must consider the nature and goals of the business: If the venture will seek passive investors or needs a distinct managerial class, an LP (or an LLC) is likely appropriate.
If all owners desire active roles and equal say, an LLP will usually be preferable to a GP, as it provides a safety net against catastrophic liabilities with minimal downsides in most jurisdictions. Only in very low-risk or short-term scenarios would one now deliberately opt for an unshielded general partnership, given the ease of electing LLP status.
Finally, the relevant uniform acts and their default rules should be carefully weighed against the parties’ intentions. A well-drafted partnership agreement can modify many default provisions, but it cannot change the fundamental fact of unlimited liability in a GP or the participation restrictions on limited partners in a traditional LP.
- Freedman, Judith, ‘Limited Liability Partnerships in the United Kingdom: Do They Have a Role for Small Firms?‘, in Joseph A. McCahery, Theo Raaijmakers, and Erik P. M. Vermeulen (eds), The Governance of Close Corporations and Partnerships: US and European Perspectives (Oxford, 2004; online edn, Oxford Academic, 1 Jan. 2010) ↩︎
- Ribstein, Larry E. “Are partners fiduciaries.” U. Ill. L. Rev. (2005): 209. ↩︎
- Ribstein, Larry E., ‘The Evolving Partnership‘, in Joseph A. McCahery, Theo Raaijmakers, and Erik P. M. Vermeulen (eds), The Governance of Close Corporations and Partnerships: US and European Perspectives (Oxford, 2004; online edn, Oxford Academic, 1 Jan. 2010). ↩︎
- Hillman, R. W. (1995). RUPA and former partners: cutting the Gordian knot with continuing partnership entities. Law & Contemp. Probs., 58, 7. ↩︎
