Table of Contents
- What Is a General Partnership?
- Understanding General Partnerships
- Aspects of a General Partnership
- Example of a General Partnership
- Advantages and Disadvantages of a General Partnership
- Is a General Partnership the Same As an LLP?
- What Are the Advantages of a General Partnership?
- Who Owns a General Partnership?
- The Bottom Line
What Is a General Partnership?
Let me explain what a general partnership is: it's a business setup where you and at least one other person agree to share the responsibilities, assets, profits, and both financial and legal liabilities of a business you own together.
In this arrangement, you agree to unlimited personal liability, meaning your liabilities aren't limited like they would be in a limited liability partnership or an LLC. You're on the hook for the debts, and your personal assets could be seized. Plus, any partner can be sued for the business's debts.
Since it's a pass-through entity, income goes directly to you and the other owners, so you report your share of profits or losses on your personal tax returns. The partnership itself doesn't get taxed.
Understanding General Partnerships
General partnerships are unincorporated businesses, so you don't need to register with the state to operate legally.
They give you flexibility to structure the business as you see fit, allowing closer control over operations.
This setup lets you make swift and decisive management decisions, unlike corporations bogged down by bureaucracy and red tape that slow things down.
To qualify, you need at least two people, and all must agree to personal liability for any liabilities the partnership incurs.
Aspects of a General Partnership
You should have a formal written partnership agreement, even though oral ones are valid. It covers the governing structure, your rights and responsibilities, and profit allocation.
The agreement can also detail what happens if a partner leaves, dies, or can't continue, like transferring their interest to survivors or a successor.
For management, ideally your agreement addresses it, but if not, you can follow the Revised Uniform Partnership Act (RUPA), adopted by most states. It outlines creation, rights, duties, assets, liabilities, fiduciary duties, profit allocations, and voting rights.
Each partner can make binding decisions unilaterally, binding everyone else, which can cause disagreements. That's why successful partnerships include conflict resolution in agreements.
Sometimes you might require consensus or majority votes for big decisions, or appoint non-partners to manage like a board. Broad agreement is key because with unlimited liability, even innocent partners can face financial fallout from others' actions.
For compensation, you get distributions from profits, based on the agreement. Without one, profits are split equally per RUPA. Undistributed money can be reinvested.
You share liability for debts and obligations, including actions by partners or employees— that's joint liability. In some states, joint and several liability means any partner can be sued for others' actions, and you sort out shares later.
You have fiduciary duties to act in the partnership's best interest. Breaching them can make you personally liable for harm caused.
Key duties include good faith and fair dealing, where you act honestly; loyalty, avoiding personal activities that harm the partnership and disclosing conflicts; care, acting prudently without liability for good-faith errors; and disclosure, sharing info on risks or conflicts.
On taxes, the partnership doesn't pay income taxes; income passes to you for personal returns. You pay on undistributed earnings too. By March 15, you get a Schedule K-1 for your share of income, losses, etc., used for your return. Include Schedule SE for self-employment taxes. The partnership files Form 1065 by April 15 as an informational return.
Example of a General Partnership
General partnerships are common for people working together or service providers like law firms, medical practices, and architectural firms, due to their straightforward, low-cost setup. Families or spouses running businesses often choose them too.
Advantages and Disadvantages of a General Partnership
Advantages include being cheaper and easier to set up than corporations or LLPs, with less paperwork—no state filing usually required, though local permits might be. No taxes for the entity, no annual reports, and easy to dissolve.
Disadvantages are unlimited personal liability, where your assets can be seized for debts. You deal with consequences of others' actions, disputes can harm the business unless planned for, and as the business grows, risks increase, often leading to restructuring.
Is a General Partnership the Same As an LLP?
No, while both are partnerships and pass-through, a general partnership exposes you to unlimited personal liability, unlike an LLP which limits it to your investment, protecting personal assets.
What Are the Advantages of a General Partnership?
You can set it up simply by agreeing and starting work, usually without state registration or incorporation. It dissolves easily if a partner leaves, and it doesn't pay taxes— you do personally.
Who Owns a General Partnership?
You and the other partners own it. Your agreement should state who the owners are and profit shares.
The Bottom Line
A general partnership means you and at least one partner share running the business with unlimited liability for debts. You report profits and losses on personal taxes; the partnership isn't taxed. It's easy to start and end, but as it grows, you might need to limit liability exposure.
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