The two common types of partnership are general partnership and limited partnership
This is the most common type of partnership and occurs when all partners are actively involved in the management of the business and are liable for business debts and liability.
This type of partnership has both general and limited partners. The general partners are involved in the management of the business while the limited partners act as investors in the business.
Common differences between general partners and limited partners
- General partners are actively involved in the management of the business while limited partners have minimal to no control of the business.
- General partners share profit and losses equally while limited partners share profits in terms of their individual contributions
- General partners have unlimited liability, which means that their personal assets can be used to settle partnership debts. Limited partners have limited liability which means their personal assets cannot be used to settle debts.
- General partners can make legally binding decisions while limited partners cannot make legally binding decisions on their own.
Discussion Question 1
Which of the following statements regarding partners in a limited partnership is true? The select the correct answer from options below
- Only limited partners must pay self-employment taxes.
- Only general partners are actively responsible for operating a limited partnership’s business.
- Only a general partner’s liability for partnership debts is limited to the amount of the partner’s contribution or investment.
- Only limited partners are actively responsible for operating a limited partnership’s business.
Remember that limited partnership has both general and limited partners, and unlike the limited partners who are investors and are not involved in management, the general partners are actively involved in the management.
- Option 1 – This statement is incorrect because, in partnership, each partner has to pay their own taxes, including income taxes and self-employment taxes. The fact that the individual is a partner whether general or limited, does not shield them from paying state and federal taxes.
- Option 2 – This statement is correct as we earlier said the general partners participate in management while limited partners do not.
- Option 3 – This statement is incorrect because the general partners have unlimited liability. It is the limited partners who have limited liability – up to the individual contributions.
- Option 4 – This statement is incorrect because limited partners are not involved in management.
Therefore, the correct answer to this question should be option 2: Option 2 – This statement is correct as we earlier said the general partners participate in management while limited partners do not.
Discussion Question 2
Light Aircraft, LP, is a limited partnership. Mike, a limited partner, participates in the firm’s management. New Parts Support, Inc. (NPS), is one of the firm’s creditors. Based on Mike’s conduct, NPS believes that he is a general partner. In terms of his liability for the firm’s obligations to NPS, Mike has, ____ in relation to the general partners. Select the correct option
- A. Less liability
- B. More liability
- C. The same liability
- D. None of the above
Limited partners do not participate in management. Though Mike is participating in the management of Light Aircraft LP, he is a limited partner with less power compared to general partners of the same company.
Limited partners have limited liability up to their individual contributions. Considering this, we can conclude that Mike has less liability in relation to the general partners.
Therefore, the correct answer to this question would Less liability (option A).
Discussion Question 3
June and Sue are partners in a computer business that is in the process of dissolution. Both wish to keep a certain desk lamp after the business is wound up. Because Sue paid for the lamp with partnership funds, she
- A. Is entitled to lamp only if it was originally June’s idea to buy it
- B. Is entitled to the lamp only if it was originally her idea to buy it
- C. Has no preference over regarding the ownership of the lamp
- D. None of the above
During the formation of a partnership, the partner’s sign partnership agreement which stipulates all partner’s responsibilities in the entity, and their share in terms of profit and loss.
It is the partnership agreement that indicates how much each partner should contribute towards the business, which determines share received by each upon partnership dissolution.
Upon, dissolution, the partnership is required to sell remaining assets and settle debts and existing liabilities. If all debts are settled and still remain some profit, partnership agreement guides the process of sharing.
None of the partners has preference over the other in retaining the lamp unless this was stated in the partnership agreement. The lamp is sold and income divided among the two partners accordingly. So the answer is none of the above
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