What is the nature of liability of general partners as to partnership debts or obligations?

The partnership agreement of a limited partnership has almost no formal requirements, which grants the partners a considerable amount of leeway with the design of their company. However, this is not the case when it comes to liability: the limited partner is limited in principle, exclusively up to the limit of their personal partner capital contribution, i.e. the money or assets contributed to the enterprise. Their private assets remain untouched.

General partner liability, on the other hand, is unlimited, and their personal assets can be at risk, if the business goes bankrupt and significant debts need to be repaid.

If several general partners are involved in the enterprise, they must bear the total debt in equal parts together, unless otherwise agreed in the articles of association. However, if an individual general partner does not pay enough, the disadvantaged partners have the right to claim compensation, which is usually made by indemnities and less often by reimbursed payments. Individual contractual provisions with creditors may permit a limitation of liability under certain circumstances. It is also not unusual for a limited liability company to act as the general partner in a limited partnership. Liability is then limited to the LLC’s assets.

Liability is therefore the most important difference between the limited partner and the general partner in a limited partnership. However, at the beginning it is not easy to completely separate them. As long as the limited partner contribution has not been made and properly documented, the limited partner is treated as a general partner from a legal perspective, with all the associated liabilities. This is particularly dangerous if the founding partner turns out to be untrustworthy. In order to avoid risks, the limited partner should only join a limited partnership once their capital contribution and position as a limited partner are accurately registered – not a moment earlier.

Definition of partnership

1.—(1)  Partnership is the relation which subsists between persons carrying on a business in common with a view of profit.

(2)  But the relation between members of any company or association which is —

is not a partnership within the meaning of this Act.

Rules for determining existence of partnership

2.  In determining whether a partnership does or does not exist, regard shall be had to the following rules:

Postponement of rights of person lending or selling in consideration of share of profits in case of insolvency

3.  In the event of any person to whom money has been advanced by way of loan upon such a contract as is mentioned in section 2 or of any buyer of a goodwill in consideration of a share of the profits of the business, being adjudged a bankrupt, entering into an arrangement to pay his creditors less than the full amount owed, or dying in insolvent circumstances, the lender of the loan shall not be entitled to recover anything in respect of his loan, and the seller of the goodwill shall not be entitled to recover anything in respect of the share of profits contracted for, until the claims of the other creditors of the borrower or buyer for valuable consideration in money or money’s worth have been satisfied.

4.  Persons who have entered into partnership with one another are for the purposes of this Act called collectively a firm, and the name under which their business is carried on is called the firm‑name.

What are personally liable for the debts and obligations of the general partnership?

Are partners liable for partnership debts?

What are the liabilities of a general limited partner?

What is a general partner responsible for?