General Partnership vs. Limited Partnership: 2025 Guide

Launching a small business with a friend or partner comes with a lot of responsibility and risk for all parties involved. But that’s why partnership business structures exist: to clarify each partner’s roles when it comes to those risks and responsibilities. 

Which is the right type of partnership for you? Choosing your business structure is one of the most important business decisions you’ll make, so understanding your options is crucial to your success.

Two of the most common types of partnerships are general partnerships (GP) and limited partnerships (LP). They’re often conflated, but there are key differences that substantially affect how partners participate in running the company, how they benefit from the profits, and how they’re accountable for its losses. Understanding these differences helps you make an informed choice that aligns with your business goals and risk tolerance.

Read on to learn the ins and outs of your options, including a step-by-step guide on how to form your own business partnership. 

What is a general partnership (GP)?

A general partnership (GP) is a business entity made up of two or more general partners who share responsibility for the business. General partnerships are formed via a general partnership agreement—either verbal or written—made between partners who all agree to share in the company’s profits, losses, and assets.

General partnerships are:

• The default business structure for partners: Just like sole proprietorship is the default business structure for individual business owners, a general partnership is the default for multiowner businesses. 
• Pass-through entities: Partners in a general partnership pay taxes on profits at the personal level. Compare this with corporations, in which profits are taxed twice—first at the corporate level and then at the owners’ personal level.
• Usually equal: Partners in a general partnership take on equal personal responsibility for the business. That means equal shares of profits and equal liability for debts or legal action. Partners can adjust the split of both profits and liabilities in their partnership agreement, but an equal split is the default.
• Not liability shields: Partners in a general partnership take on personal responsibility for the business and cannot shield their personal assets from legal claims or debts incurred by the business.

What is a limited partnership (LP)?

A limited partnership (LP) is a business structure similar to a general partnership, but with a key difference: It includes additional limited partners who invest in the business but who—unlike a general partner—are not involved in the day-to-day operations of the business.

It’s common for some partners to be referred to as “silent partners” in a limited partnership. It typically requires a written partnership agreement where the roles of the business partnership are explicitly defined for everyone involved.

How are limited partnerships used?

Limited partnerships are particularly useful for businesses that have high startup costs or require investment from multiple parties.

Check out these examples of how limited partnerships are used in different types of business:

Real estate limited partnerships 

Limited partnerships are used often in real estate business partnerships. In such ventures, there may be several limited partners who provide funds to purchase a piece of property. For example, general partners may manage tenants and daily maintenance of the property, while limited partners typically only benefit from a portion of the rental income or ultimate resale of the property without directly contributing to operations.

Private equity limited partnerships

Limited partnerships are also used in private equity or joint ventures. Private equity firms purchase portfolios of privately owned companies, work to increase their value, and then aim to sell their ownership for a profit. Limited partners in a private equity context might offer seed funding for portfolio purchases, while general partners handle the day-to-day running of the firm and the detailed work of growing the value of portfolio companies.

Small business limited partnerships

The limited partnership business structure is particularly relevant and applicable to small businesses that have high overhead costs, such as a retail store. Limited partners may provide investments to purchase inventory and rent a brick-and-mortar storefront, while a general partner might be in-store day-to-day to manage operations and make sales.

General partnerships vs. limited partnerships: key differences

The main difference between these partnerships is that general partners have full operational control of a business and unlimited liability. Limited partners have limited liability and do not take part in day-to-day business operations.

Establishment and formation requirements

• How they’re similar: Setting up either a general or a limited partnership requires that partners have an agreement between them to form and operate a partnership.
• How they’re different: General partnerships require only an agreement (even just a verbal one) between the partners to get up and running. Limited partnerships require additional steps, including a written agreement. You and your partners will need to file a certificate of limited partnership with the secretary of state’s office in your state of operation. On this form, you’ll appoint a registered agent, which often can be the general partner.

Ownership and management roles

• How they’re similar: Both general and limited partnerships have multiple owners.
• How they’re different: All partners are general partners in a general partnership, and ownership responsibilities are spread equally among them. In a limited partnership, operations are handled by general partners, whereas limited partners do not take part in the day-to-day running of the business. Limited partners serve only as investors in the business.

Liability protection and risk

• How they’re similar: Partners in both general and limited partnerships share in the profits, liabilities, and losses of the business.
• How they’re different: Limited partners share in losses and liabilities only to the extent of their investment in the company. General partners have unlimited liability for debts and lawsuits. This means both the business’s assets and a general partner’s personal assets can be used to pay off the company’s debts or may be reached by plaintiffs who successfully sue the partnership.

Profit and loss distribution

In a general partnership, profit and loss distribution follows the partnership agreement terms, with equal sharing as the default. Each partner reports their share on their personal tax returns. Limited partnerships offer more flexibility—they receive returns proportional to their investment, while general partners typically receive both a management fee and a share of profits. This structure allows investors to participate in profits without operational responsibilities.

Tax implications and benefits

• How they’re similar: Both general and limited partnerships are pass-through entities when it comes time to pay taxes. That means owners don’t need to file separate business taxes; instead, they report the business income on their personal tax returns.
• Self-employment tax considerations: General partners must pay self-employment tax on their entire share of partnership income, since they’re actively involved in the business. Limited partners typically don’t pay self-employment tax on their investment returns, only on any guaranteed payments they receive for services rendered to the partnership.

How to choose between a general partnership and limited partnership

As you’re exploring which is the right partnership structure for you, take the time to consider your business goals, your risk tolerance, and the roles each of your partners will play in your business. Understanding when each structure makes sense can save you time, money, and potential legal complications down the road.

When to choose a general partnership

General partnerships work best when all partners want equal involvement in daily operations and decision-making. 

Choose this structure when:

• You’re starting a business with partners who will all be actively involved
• You want a simple structure with minimal paperwork and filing requirements
• All partners are comfortable sharing unlimited liability
• You’re operating a professional service business where all partners contribute expertise
• You want maximum flexibility in profit sharing and management decisions

When to choose a limited partnership

Limited partnerships make sense when you need investors who won’t participate in daily operations. 

Consider this structure when:

• You need to raise capital from investors who want limited liability
• Some partners will be passive investors while others manage the business
• You’re launching a real estate investment or private equity fund
• You want to maintain control while bringing in financial partners
• You need a structure that clearly separates management from investment roles

How to form a partnership: step-by-step guide

Regardless of which business structure you choose, forming a partnership requires careful planning and proper documentation. While the process varies by state and partnership type, following these steps will help ensure you establish yourbusiness partnership correctly from the start.

General partnership formation steps

1. Choose your business name and verify it’s available in your state.
2. Draft a comprehensive partnership agreement outlining roles, responsibilities, and profit sharing.
3. Obtain an employer identification number (EIN) from the IRS.
4. Register your business name with your state (if different from partners’ names).
5. Apply for necessary business licenses and permits.
6. Open a business bank account in the partnership’s name.
7. Set up accounting and bookkeeping systems.

Limited partnership formation steps

1. Choose a business name that complies with your state’s LP naming requirements.
2. Select a registered agent for service of process.
3. File a Certificate of Limited Partnership with your state’s Secretary of State.
4. Create a detailed limited partnership agreement defining general and limited partner roles.
5. Obtain an EIN from the IRS for tax purposes.
6. File for required business licenses and permits.
7. Open business bank accounts and establish financial controls.
8. Get business insurance, including but not limited to workers’ comp.
9. Comply with any state-specific publication requirements.

State-specific requirements and fees

Formation requirements and fees vary significantly by state. It’s best to take your time thoroughly researching what’s required in the state where you’re establishing your business partnership. 

Here are examples from major business formation states:

• Delaware: Known for business-friendly laws, Delaware charges $200 for LP formation and requires annual franchise tax. The state offers strong privacy protections and doesn’t require limited partners to be listed in public records.
• California: Californiarequires a $70 filing fee for LP formation plus an $800 annual franchise tax. 
• New York: The state charges $200 for LP formation and requires publication of formation notice in two newspapers for six weeks. This publication requirement can add $1,000 to $2,000 to formation costs.
• Texas: Texas has a $750 formation fee for LPs, with no publication requirements. 

Other types of business partnerships

Although general and limited partnerships are the more common choices, there are other partnership structures available to business owners as well. Understanding these alternatives can help you choose the bestbusiness structures for your specific needs and goals.

Limited liability partnerships (LLP)

A limited liability partnership, or LLP, is a type of business entity that affords partners personal liability protection. Partners in an LLP don’t assume liability for wrongdoing or errors made by other partners. This makes the LLP structure popular with (and typically limited to) law firms, doctors, accountants, and other professionals who are licensed and can face malpractice lawsuits. Unlike limited partnerships, partners in LLPs can be active in day-to-day firm affairs while maintaining their liability shield. When comparing structures, many professionals compareLLPs vs. LLCs to determine which offers better liability protection for their specific industry.

Limited liability limited partnerships (LLLP)

A limited liability limited partnership (LLLP) combines features of limited partnerships and LLPs. In an LLLP, even general partners receive liability protection, shielding their personal assets from partnership debts and obligations. This structure is recognized in about half of US states and is particularly popular for real estate holdings and investment funds. The main advantage of an LLLP is that general partners can maintain management control while enjoying the same liability protection as limited partners.

Joint venture partnerships

A joint venture partnership is formed temporarily by two or more parties who agree to pool resources for the purpose of accomplishing a specific objective. Parties in a joint venture partnership can be two or more individuals, companies, or even other partnerships.

Let’s say you own a coffee shop, and the retail space next door becomes available. If you can’t afford the rent on your own, you might form a joint venture partnership with a bakery or bookshop to acquire the extra space.

While each of the partners is responsible for profits, losses, and costs associated with pursuing the objective, the joint venture partnership is its own legal entity. Joint venture partnerships aren’t a business entity unto themselves; they’re a way of forming one. Joint venture partnerships can form corporations, traditional partnerships, or limited liability companies. 

The tax treatment and liability limitation of a joint venture partnership will vary depending on the form it takes. If a joint venture coffee shop/bookstore forms as an LLC, for example, and a customer injures themselves on the premises, the joint venture LLC would assume liability and shield ownership from any legal payouts. 

Partnership agreements: essential elements

A well-drafted partnership agreement is crucial for any partnership’s success. This legally binding document should address key operational and financial aspects to prevent disputes and clarify expectations. 

Essential elements to include are:

• Capital contributions: Initial investments from each partner, and procedures for additional contributions.
• Profit and loss allocation: How profits and losses will be distributed among partners.
• Management structure: Decision-making authority and voting rights for major business decisions.
• Partner duties: Specific responsibilities and time commitments expected from each partner.
• Withdrawal provisions: Procedures and buyout terms for partners leaving the partnership. 
• Dispute resolution: Methods for resolving conflicts between partners.
• Dissolution terms: Conditions that would trigger partnership dissolution and asset distribution.
• Admission of new partners: Process for bringing in additional partners.

Real-world partnership examples

Understanding how partnerships work in practice can help you figure out if this structure fits your business goals. 

Check out these examples of how different industries leverage partnership structures:

Small business partnerships

Many successful small businesses start as partnerships between friends or colleagues with complementary skills. For instance, a graphic designer and a web developer might form a general partnership to offer full-service digital marketing. Each partner brings unique expertise while sharing operational responsibilities and profits equally. This structure allows them to pool resources, share client networks, and scale faster than they could individually.

In the retail sector, partnerships often form when entrepreneurs want to share startup costs and risks. Two fashion enthusiasts might partner to open a boutique, with one handling inventory and merchandising while the other manages marketing and customer service. Their partnership agreement would outline each partner’s investment, working hours, and profit distribution based on their contributions.

Real estate partnership structures

Real estate investments frequently use limited partnership structures to pool capital while maintaining clear management roles. A typical structure might include one or two general partners who identify properties, arrange financing, and manage renovations, while limited partners provide capital in exchange for a share of rental income and appreciation.

For example, a real estate developer might form an LP to purchase and renovate an apartment complex. The general partner contributes 10% of the capital but handles all management duties, while limited partners contribute the remaining 90% as passive investors. The partnership agreement might specify that limited partners receive a preferred return of 8% annually before profits are split 70/30 between limited and general partners. This structure allows investors to participate in real estate without being responsible for day-to-day management.