An active partner, also known as a participating business partner, is an investor who actively works in the business partnership, helping with day-to-day management. This is the more common type of partnership, and one of the simpler ones to create. Profits, losses and responsibilities are equally shared between the partners, and the partnership is not taxed as a business. In contrast to an active partner is a limited partner; in addition to requiring more paperwork, a limited partner experiences restrictions on his or her power and profit sharing.
When two or more people or entities come together in an active partnership, they all agree to a general partnership. This means that, while not specifically measured, each partner will divide the responsibilities of the company and manage with equal power. Along with sharing responsibility, all losses and profits also are shared. The profits and losses normally are shared equally, but partners also can specify while completing the partnership-forming paperwork to only share in part of the profits and losses.
Compared to other partnership ventures, an active partner combination requires a relatively small amount of paperwork. This is because most of the business aspects are divided equally, so there is no reason for more complicated paperwork outlining who is in charge of what. A legal agreement must be signed between all partners, stating that they each own an equal portion of the business.
The partnership is not taxed like a normal business at tax time. Instead, each partner is responsible for filling out a personal return, detailing the profits and losses experienced by that partner. This is in contrast to how a business files a tax return as one conglomerated entity.
The darker side of joining a partnership is that one partner also is responsible for the other partners. For example, one active partner makes a loan but cannot repay it because the partnership is not doing well. After all of that partner’s assets are taken and money remains to be paid, the bank will penalize the other partner, even if he or she did not personally make the loan. While the profit is shared, so is all the loss and negligence.
A limited partner is in contrast to an active partner. This partner invests money into the partnership but only has limited power and limited profit sharing. Some agreements also will state that this partner has limited liability for losses or legal suits. This describes people who are interested in investing in a new partnership but are not interested in running the partnership.