A limited partnership offers shareholders numerous advantages and is particularly suitable for a family business. However, anyone wishing to become a general partner in a limited partnership should be aware of their responsibilities and consider the decision carefully. The following example illustrates the consequences of an ill-considered decision:
Jenny Smith has always dreamed of being her own boss. After careful consideration, she decides to go into business for herself by selling innovative office furniture. Tables that can be folded out and adjusted in height, office chairs with integrated massage functions, and lamps that adjust their light intensity according to natural light present – these are her planned bestsellers.
Her sister Annie and brother Alex are enthusiastic about the business idea and want to be part of it, contributing a considerable amount of money. Since Alex’s former classmate founded a limited partnership several years ago, Alex knows about the advantages of this legal structure and is able to convince Jenny to start a limited partnership. For Jenny Smith, it was clear from the outset that she wanted to run the company, so, as a general partner, she contributed around $30,000 to the “Smart Office” company. Her siblings Annie and Alex each have a role as limited partners, contributing $10,000, which they register as a liability sum.
Business has been good for about a year, and all the shareholders are satisfied with their profits and responsibilities. However, in their third financial year, numerous competitors appear in the market, offering significantly lower prices and consistent quality. “Smart Office” becomes insolvent and must pay debts to the value of $100,000. However, in addition to the existing limited partnership capital ($30,000 from Jenny Smith and $10,000 from each of her siblings) is not enough.
Annie and Alex each lose $10,000, thus fulfilling their obligation as limited partners of the limited partnership – their private assets remain untouched. However, Jenny Smith is a general partner and must pay the remaining $50,000 herself. It doesn’t matter whether or not she has sufficient financial means. Her car, house, apartment (i.e. her property) must also be used for repayment.
It would be useless to dissolve the limited partnership in this instance, since after the dissolution Jenny Smith still has to settle the debts using her personal assets. Anyone who wants to start a limited partnership with a general partner role should be aware of this risk and responsibility. Jenny Smith could have reduced her liability risk if she had started a limited liability corporation as a general partner. You can read more about this in our article on founding a limited partnership: liability, costs, and more.