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What Is Your Liability In a Partnership?

Partnerships are an excellent vehicle for individuals with a certain skill set to become a business owner without having to go it alone and risk all of their own assets in the process. Partnerships can also be a lucrative investment platform for individuals who can offer investment capital rather than actual business expertise. However, in either situation, there are risks to personal liability involved depending upon the type of partnership the individual involves themselves in and the level of their own participation in the operation of the partnership.

Each General Partner Is Liable for the Actions of the Partnership

In a general partnership, a group of individuals enter into a partnership agreement to operate the business together with each partner specifically tasked with a certain role in the operation of the partnership. In this type of organizational structure, each individual partner is personally liable for all debts and judgments against the partnership as a whole, regardless of whether the debt was incurred by the organization or one of the individual partners.

While the general partnership offers individuals the greatest amount of actual input into the operation and success of the business, they also expose each individual partner to the greatest amount of personal liability, up to and including all of their own personal assets.

Limited Partners Only Risk the Assets They Invest

A limited liability partnership, also known as a silent partnership, is very different from a general partnership in regards to both the individuals' level of participation in the operation of the business and the level of their personal liability should something go wrong. Unlike a general partnership, a limited partner does not play an active role in the day-to-day operation of the business.

  • Limited partnerships offer individuals a platform to invest in the business with the promise of a return on their investment.
  • In exchange for having a minimal amount of control over the business, limited partners receive the benefit of protection against any liability the business might incur beyond their initial investment.
  • A limited partner's personal assets are protected against any debts or judgments that the partnership might incur.

Reducing Liability Means Reducing Involvement

Those individuals who either plan on forming a partnership or investing in the potential profits of one do need to be fully aware of the extent of their own personal liability. If the individual wants to have an active role in the operation of the business, they will be subject to complete personal liability for the actions of the business. If an individual only wants to invest in a partnership for a return on the investment, then their personal assets are safe but they risk losing their investment should something go wrong. Either way, individuals should weigh the risks versus the rewards of their intended involvement in a partnership, and select the proper organization and partners carefully.