A General Partnership is created when two or more people start a joint venture together for profit. In other words, similar to sole proprietorships, a general partnership can be created by default. If two individuals do nothing more than obtain a business license before engaging business activity, they have effectively created a general partnership.
Pros of a General Partnership
- General Partnerships enable two or more people (partners) to combine resources and then share the responsibilities of running a business.
- General Partnerships are easy to create. If two people agree to own a business, share the profits, and then start conducting business, they have by default created a general partnership. Neither filing fees nor business applications need to be submitted to the state.
- Unless the partners have a partnership agreement to the contrary, each partner will have equal authority to manage the affairs of the business.
- General Partnerships are not taxed at the business level—instead, each partner reports net profit or loss on his/her individual tax return.
Cons of a General Partnership
- General Partnerships do not offer limited liability protection, like LLCs or Corporations. The partners are therefore personally liable for the business’ debts, liabilities and other obligations.
- If the business is sued, then each of the partners risks losing their own personal assets in the lawsuit.
- Because partners are subject to personal liability, investors that may seek a partnership arrangement for their financial contribution tend to shy away from General Partnerships, making investments more difficult to obtain.
- Any partner can make the partnership liable for contracts, torts, and crimes. This means that Partner A can potentially be held accountable for Partner B’s bad decisions.
- Unlike Sole Proprietorships where little paperwork is needed, a General Partnership should be accompanied by a partnership agreement that will detail operation and management of the business.
General Partnership Checklist
- Partnership Agreement. General Partnerships do not need to have a partnership agreement, but they certainly should. Partnership agreements protect the business and the partners. It is extremely common for partners to sue one another over disagreements, debts, liabilities, ownership of the partnership, profits, and assets. Frequently partners have a good relationship with one another before agreeing to carry on in business together–a partnership agreement helps protect that relationship. A partnership agreement also dictates how profits and losses should be allocated, how the partnership should be managed, how partnership assets are handled, how a partnership can be dissolved, grounds for partner expulsion, and money other potential issues.
- Buy-Sell Agreement. A buy-sell agreement, sometimes included in the partnership agreement, provides for one partner to buy the other partner’s interest in the company should that partner choose to leave the partnership.
- Insurance. Because the personal assets of the partners in a General Partnership are not protected insurance should be obtained to cover whatever liabilities the business may incur in the future.
- Business License. Even though there is no paperwork to form a General Partnership, you still must obtain all required local and municipal business licenses before commencing business. The cost of a business license differs by county, and as a general rule must be renewed each year.
- Business Name. Most partnerships operate under a trade name/business name. Therefore, the partnership must register their chosen business name with the secretary of state. Click here to read more about registering a business name, or DBA.
- Taxes. Each partner must file a Schedule C along with their individual tax return that includes the profits and losses from the business.