5.1.2.2 General and Limited Partnerships
At its most basic level, a partnership is nothing more than two or more sole proprietors who have decided to work together. It’s essentially a business that is set up as a joint account. Like a joint account, ownership in the business and treatment of assets in the event of one party’s death will be outlined in a partnership agreement and can be handled on a survivorship or percentage ownership basis. When a partnership opens an investment account, the partnership agreement will include who has trading authorization.
When a partner is actively engaged in the management of a business, she is known as a general partner. While being a general partner (a business can have more than one) comes with a lot of privileges and the opportunity to shape the way a business works, it also can come with substantial risk. The personal assets of general partners, just like sole proprietors, can be sued or pursued by creditors of the business. In short, a general partner can lose everything if things get ugly. A business where all the owners are general partners is considered a general partnership.
This exposure to risk and loss doesn’t exist for someone who is willing to be a passive partner in the business. By giving up their rights to be involved in the day-to-day operations of a business, they can be designated as a limited partner. By being a limited partner, a person can invest in a business and share in the profits, with their only exposure to loss being the money they’ve invested. In other words, the worst that could happen to them if the business goes bankrupt or gets sued is that they lose their investment in the company. Their own personal assets are off limits as a limited partner. Of course, to get this level of protection, they truly have to be a silent partner, except on key issues, such as dis