General Partner Contribution/Commitment

General Partner Contribution/Commitment - Kandersteg, Switzerland
General Partner Contribution/Commitment

A partnership requires at least two investors. In the simplest partnership all partners share the risk and reward of the investments equally. The partnership agreement may define how profits are allocated and may impact how small losses are allocated.

However, in a simple (or “general”) partnership, each partner is liable for the obligations of the partnership, even if this results in losses distributed differently from the terms of the partnership agreement (usually this is described as being generally liable).

Typically, losses are allocated to partners according to rules set forth in the partnership agreement, but when losses exceed the paid-in capital each partner is liable for the entire amount of the partnership’s liability.

Partners with adequate wealth may be required to cover partnership obligations out of proportion to the investors’ share of partnership interests if other partners are unable to assume partnership obligations.

A general-limited partnership (frequently called a limited partnership) has at least two types of partners. Limited partners make a contribution to the partnership, which they can lose if the partnership loses money. But the limited partners cannot be required to make additional contributions to the partnership or assume any additional liabilities of the partnership.

In contrast, a general partner can be required to make capital investments in a partnership to cover obligations of the partnership or assume liabilities of the partnership. Like the partners in a general partnership, all the general partners in a limited partnership are generally liable.

Frequently, general partners take steps to limit their general liability. Instead of an individual or a company investing directly in a partnership as a general partner, the investor creates a business to become the general partner. The investor funds a limited liability company like a corporation that becomes the general partner.

Although the company acting as general partner is considered to be generally liable for the obligations of the partnership, the company can have limited capital and creditors of the partnership generally cannot require the owners of the corporation acting as general partner to make additional investments.

Investments in the business that acts as general partner may be the only capital available to creditors of the partnership. This capital can be in the form of cash capital investment, other assets contributed, loans, or a note.

Suppose, for example, that an individual makes a $1 million investment in XYZ, LLC. XYZ, LLC becomes general partner in ABC, L.P. Although XYZ, LLC is generally liable for the obligations of ABC, L.P., creditors of the partnership cannot look through the corporate structure to the owner of XYZ, LLC.

If the investor makes a written agreement to let XYZ, LLC demand an additional $500,000, then XYZ LLC can be expected to lose up to $1.5 million with a $500,000 capital call if losses draw down capital.