Partnership Business Liability: Everything You Need to Know
Partnership business liability is one of the main considerations for entrepreneurs who wish to start a partnership.3 min read
Partnership business liability is one of the main considerations for entrepreneurs who wish to start a partnership. While it offers certain tax advantages, a partnership exposes its owners to liability for its debts and other financial obligations, putting their personal assets at risk. Depending on which type of partnership you own, your personal liability can be limited or unlimited.
Liability in a General Partnership
Each partner in a general partnership is subject to unlimited personal liability. According to partnership rules, all partners are legally responsible to pay off all the debts incurred by their business. In some states, a partner in a general partnership is severally liable. This means that the partner is liable for the company debts if another partner cannot afford to pay them off.
Unlike some other business entities, a general partnership does not have to be officially set up. It can be formed without any specific intent. As long as two or more people agree to start a business together, there is sufficient proof that a partnership exists.
Liability in a Limited Partnership
A limited partnership differs from a general partnership in that its partners are not unlimitedly liable for its debts. Similar to shareholders of a corporation, the partners can only lose up to the amount they invest in the partnership. As long as it has a minimum of one general partner, a limited partnership can have any number of each type of partners.
In this type of partnership, a limited partner is not allowed to take part in the company's managerial decisions or day-to-day operations. As such, the general partners are typically regarded as the original founders while the limited partners are considered outside investors.