The investors in the various projects of General Financial Services, its subsidiaries and related companies, purchased for the most part shares of partnerships that owned office buildings or apartments.
There are two types of partnerships - limited partnerships and general partnerships. For tax purposes, they have many of the same characteristics.
But there is one significant difference: a member of a general partnership is individually responsible for all the debts of the partnership - not just a proportionate share. A limited partner risks only the money he actually invests in the project.
In theory, a general partner takes an active role in the operation of the business and participates in significant business decisions. A limited partner takes a passive role - he contributes only his money.
General partnerships wer e established by GFS for office buildings in Annandale and Seven Corners. Investors in both of those projects have told the SEC or testified in various lawsuits that they did not understand the liability they were incurring when they signed the papers - even though the term "general partnership" appears in the documents.
"I can stand the $20,000 loss," one doctor told a reporter. "That's all I put in. But I cannot stand the explosure to a $1 million mortgage, and that's what I found myself facing." The doctor admitted that he did not have an attorney review the documents before he signed them.
Lending institutions - banks, insurance companies, etc., - may required significant individual worth on the part of the general partners before they make a loan, particularly for a construction project.
But once a building is up, a "limited partnership" is the more normal arrangement, according to a number of experts. The building itself is the security on the loan.
Making the subject even more confusing for the layman is the fact that a limited parthership must also have a "general partner," one who is responsible for running the business for the benefit of the passive partners. GFS assumed this role in all of its projects - whether they were technically limited or general partnerships!