The roles and responsibilities of each partner could help determine who acts as a general partner or a limited partner. The California Secretary of State website notes that when at least two individuals begin a business to generate profit, they create a general partnership.
General partners may participate in profit-making activities and divide the proceeds. As noted by Forbes, a partnership agreement may outline each partner’s ownership stake and capital contributions. Terms may also establish a system for partners to resolve disputes or end their relationship.
Operating a general partnership
California allows general partnerships to form without filing an official registration statement with the Secretary of State. If an individual starts performing work with another person to earn income, they may have already established a general partnership.
The members of a general partnership have joint liability in paying the enterprise’s expenses and obligations. The Corporate Finance Institute explains that businesses formed as general partnerships are not required to pay income taxes. Profits instead flow through the business to the general partners. Those profits are then taxed as income on each individual’s tax return.
Engaging in a limited partnership
A limited partnership business requires one individual acting alone as a managing “general” partner. He or she oversees the business operations and controls the enterprise. The other partners may then classify as “limited” partners. They may not take part in business activities and they also have limited control. Limited partners only lose up to the amount of money they invested. They could also divide profits as per an agreement.
Before starting a business venture with another individual, the parties may discuss establishing a general partnership. If one individual takes an active management role, the involved parties may wish to create a limited partnership agreement. The agreement could outline the degree of each individual’s ownership and liability.