What Are Partnerships? - dummies

By Kenneth Boyd, Lita Epstein, Mark P. Holtzman, Frimette Kass-Shraibman, Maire Loughran, Vijay S. Sampath, John A. Tracy, Tage C. Tracy, Jill Gilbert Welytok

Partnerships avoid the double-taxation feature that corporations are subject to, because all profits and losses “pass through” the business to its partners. Partnerships also differ from corporations with respect to owners’ liability:

  • General partners are subject to unlimited liability. If a business can’t pay its debts, its creditors can reach into general partners’ personal assets. General partners have the authority and responsibility to manage the business. They’re roughly equivalent to the president and other high-level managers of a business corporation.

    The general partners usually divide authority and responsibility among themselves, and often they elect one member of their group as the senior general partner or elect a small executive committee to make major decisions.

  • Limited partners escape the unlimited liability that the general partners have hanging around their necks. Limited partners aren’t responsible, as individuals, for the liabilities of the partnership entity. These junior partners have ownership rights to the business’s profit, but they don’t generally participate in the high-level management of the business. A partnership must have one or more general partners; not all partners can be limited partners.

Many large partnerships copy some of the management features of the corporate form — for example, a senior partner who serves as chair of the general partners’ executive committee acts in much the same way as the chair of a corporation’s board of directors.

In most partnerships, an individual partner can’t sell his interest to an outsider without the consent of all the other partners. You can’t just buy your way into a partnership; the other partners have to approve your joining the partnership. In contrast, you can buy stock shares and thereby become part owner of a corporation without the approval of the other stockholders.