What’s the Difference Between a General Partner and a Limited Partner?

Julien Fissette
Published on
March 14, 2024
Last edited on
min read
min read

What’s the Difference Between a General Partner and a Limited Partner?

Julien Fissette
Published on
March 14, 2024
Last edited on
min read
min read
Business partners in discussion

If you’re a funder looking to step up or diversify your holdings, you may have thought about investment funds or Special Purpose Vehicles (SPV) as an option. These structures represent great investment opportunities for individuals as your money gets pooled to acquire assets that might not otherwise be open to you as a solo investor. 

Investment funds are often set up as limited partnerships. These are legal entities in their own right and administered under the terms of a Limited Partnership Agreement (LPA). The fund owners, known as members, fall into two classes: General Partners and Limited Partners

While all partners share the fund’s ownership, they don’t have the same rights and duties. General Partners operate the fund, while Limited Partners simply invest. Limited Partners’ financial risk is limited to the amount they invest, whereas General Partners are exposed to the fund’s business risk.  

Let’s take a deep dive into these differences. 

Roles and Responsibilities of the General Partner

Investing is a specialist skill, and General Partners take the burden of this work, while the other investors sit back and (hopefully) enjoy the upside of their efforts. 

The General Partner’s Duties in Detail 

General Partners Make Decisions and Manage the Fund

General Partners are usually co-investors with all the other partners. But it’s the General Partners that make all the business decisions and manage the fund’s operations, monitoring its performance and sending out information to investors.

Here are some of their tasks:

  • Creating the fund’s business plans and securing finance
  • Looking for potential investors like you
  • Securing approvals from regulators 
  • Scouting for talent and businesses, attending pitch events, picking targets
  • Investigating targets’ affairs pre-investment
  • Monitoring performance post-investment
  • Preparing and filing accounts 
  • Taking care of admin 

General Partners Invest Money on Behalf of the Limited Partners  

When you subscribe to an investment fund, the General Partners pool your money alongside that of the other partners and buy the assets underpinning the fund, such as property or shares in a business. 

General Partners Have Unlimited Liability and Associated Risks

Because it’s the General Partners who make all the fund’s business decisions, they’re on the hook for any business losses. What’s more, their exposure to the outside world is unlimited. They may be asked to give personal guarantees too. In return, they’re paid management and performance fees (‘carried interest’). 

Roles and Responsibility of the Limited Partners 

Limited Partners are the largest group of investors in a fund. They don’t have any say in the way the fund is run, but sometimes the LPA may give them veto rights over major decisions so that they can block changes to the fund that don’t align with their investment principles. 

Limited Partners Invest Based on the LPA 

If you’re a partner in an investment fund, you’ll turn to the LPA to explain what the fund’s been set up to do, and what the rationale is behind your investment. For example, the LPA will tell you the minimum investment you must make, and any rights you’ll have in return such as the option to participate in further calls to invest. You won’t own any assets held by the fund directly, as this property and the right to any return are held by the fund itself. 

Limited Partners Have No Involvement in Decision-Making

As a participant in an investment fund, don’t expect to have any say in the way the fund is run, or any participation in any underlying businesses. Your role is that of a passive investor. 

Limited Partners’ Liability Is Limited to Their Investment

The major upside of being a Limited Partner in an investment fund is that if the fund’s business fails, you won’t be liable for any of its business debts. Your obligation is strictly limited to the amount you’ve invested or committed to invest.   

The Risks and Rewards For General Partners

In return for the General Partners’ fund management, they receive admin fees, usually calculated as a percentage of capital invested. They also get something known as ‘carried interest’. Carried interest, or "carry", is a share of the profits of an investment that is paid to the investment manager, beyond the amount contributed to the fund. It serves as a performance fee and aligns the interests of the manager with those of the investors. 

The Risks and Rewards For Limited Partners

The good news for Limited Partners is that you share in any gains made by an investment fund. You can also point to your successful track record when looking to participate in future investments. Another advantage is you won’t have to invest as much upfront, since thresholds for investment in these types of funds can be lower than direct investment in an asset class. And, as we’ve seen, your financial exposure is limited to your investment amount. 

If you’re wondering when you’ll be able to realize your gains, it depends on the LPA. The fund will likely envisage an exit point from an asset, which could be, if that asset is a business, when it goes public. You may receive your return then, less carried interest and management fees. However, the collection of money from the target by the fund does not always mean direct distribution to investors as the fund may choose to re-invest. Again this comes down to the specific terms of the LPA.

Should the underlying asset fail, the GPs will face liability. Though the fund itself and the Limited Partners will be largely shielded. LPs will receive their money back once the creditors are repaid and won’t be asked to contribute further to losses, while GPs will be paid last. 

How This Structure Encourages Risk Diversification

For investors looking to diversify risk, investment funds are a top choice. Because initial thresholds tend to be small, you can spread your money across different funds, choosing to invest across different market sectors or asset classes for example. 

The Importance of the Limited Partnership Agreement In Defining Roles

The LPA is a binding contract between the partners. It’s the LPA that underpins the fund and defines its investment objectives. If you want to know your rights as a Limited Partner, whether that be vis-à-vis the fund, the underlying assets, your co-investors, or the General Partners, you must look to the LPA.  

Key Points to Include in a Limited Partnership Agreement

The LPA has to contain, at a minimum, the following:

  • A description of the fund’s objective and investment thesis
  • A description of the roles of the General and Limited Partners
  • How much partners have to invest
  • What their voting rights will be
  • How often meetings or consultations will take place
  • What rights do partners have to information
  • How the management fees and carried interest will be calculated
  • When investors exit 

Case Studies and Practical Examples

Imagine you have a contact who is looking to get a project off the ground. You’re confident they will succeed and wish to invest. Your choices are to invest directly or set up a venture capital fund geared towards this type of investment. These options will involve time, money, and substantial effort (and risk) on your part. 

Alternatively, you could set up or participate in an investment fund. By spreading the risk with your co-investors, you can share the upside plus earn management fees for your efforts if you’re a General Partner. Investment funds are simpler and cheaper to set up than venture capital (VC) funds and require less up-front investment. 

Example One: Fund to M&A

You are the GP of a fund specializing in Food and Beverage investments. You encounter LoveBeer and decide to use the money raised from ten Limited Partners to invest in this new craft beer start-up, as per your investment thesis. You invest a total of €100K in LoveBeer at a valuation of €1M.

After several years of growth, LoveBeer is purchased by a beer conglomerate. If LoveBeer is valued at €10M during this acquisition, assuming there was no dilution since your investment, each LP’s shares will now be worth ten times their original investment, or €100K per share. Depending on the terms of the LPA, €1M may be distributed from the fund to the Limited Partners (minus your GP management fee) or it will be reinvested in another company. 

Example Two: Liquidation

LoveBeer fails in year three.

LoveBeer will use any funds remaining to pay its creditors, and then repay its investors based on the seniority of their shares. If some money reverts to the fund, it can be passed on to the partners or reinvested.

The GPs won’t ask Limited Partners to contribute any further to any of the fund’s or LoveBeer’s losses. Even though that investment failed, the General Partners will nevertheless have accrued management fees during the investment period. 


General Partners manage investment funds set up to invest according to a specific investment thesis defined in the LPA. They have unlimited liability for the fund’s losses and receive fees for carrying out their role. In contrast, Limited Partners are passive investors who rely on the General Partners to manage their investment, and their risk is limited to their investment. 

If you’re considering an investment fund, you need to do your homework. The onus is on you, as an individual investor, to ensure your General Partners have what it takes to make a success of the investment. 

Check out Roundtable to find out more about investment funds and start your journey to becoming a private investment expert.


[1] https://www.arborcrowd.com/real-estate-investing-learning-center/general-partners-limited-partners-commercial-real-estate-transactions/

[2] https://www.investopedia.com/terms/l/limitedpartnership.asp

[3] https://www.investopedia.com/articles/investing/093015/understanding-private-equity-funds-structure.asp