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A general partnership is a business arrangement in which two or more business partners co-own a business and are equally responsible for its running, profits, debts, liabilities, and assets.
A general partnership is a common ownership structure for small or local businesses. As such, it is worth investigating for those looking to establish or develop their business in concert with another owner or director.
In this article, we’ll go over:
- What a general partnership is
- The pros and cons of a general partnership
- How a general partnership compares to other business structures
- How to form a general partnership
- A general partnership requires two or more business owners.
- General partners must have some sort of agreement in place governing their partnership.
- General partnerships do not confer any liability to partners.
- Partners pay the taxes on their business as part of their personal tax returns.
What is a General Partnership?
General partnerships are business entities in which two or more co-owners are completely and equally responsible for the running of the business.
General partnerships are unincorporated, which means that they are not a corporation and do not exist as legal entities beyond the partners who own them.
General partnerships are “pass-through” entities. This means that instead of paying corporate taxes as an entity itself, the profits and losses of a general partnership are passed directly to the partners, and taxes are paid on their personal returns.
General partnerships confer no liability protection, which means that should the partnership liquidate, the partners are personally liable for any outstanding debts or other liabilities of the business.
Examples of a General Partnership
Since general partnerships don’t require registration to operate, they are a popular choice for business owners looking to set up shop together.
Often, businesses run by professionals or specialists are general partnerships because while each of the partners is able to run a business on their own, they benefit from working together to spread their reputation and reach in the market.
For example, dentists or lawyers might run a general partnership.
Having a practice in which each of the partners is an equal owner doesn’t prevent them from having employees, but it does allow each lawyer who could run a personal practice to have equal ownership over a joint practice.
Because profits and losses are shared equally in a general partnership, it is similar to running a sole proprietorship with the added benefit of having other professional partners who are also bringing in revenue and helping with the day-to-day operations.
Criteria of General Partnerships
There are a variety of criteria that general partnerships have to meet in order to qualify for the title and structure of a general partnership.
While a general partnership doesn’t require articles of incorporation or registration with state government, there are other requirements such as:
A general partnership requires a form of agreement. A written agreement is best as it outlines the responsibilities and structure of the general partnership.
However, in some states, a verbal agreement is considered valid as an operating contract.
General partners are generally responsible for the management of the business from a strategic level and the overall decision-making on business direction.
Day-to-day management can be handled by partners, but there’s no reason they can’t hire an employee in a managerial role.
General partners share decision-making responsibility along with all business responsibilities.
The profits of a general partnership are by default shared between all of the partners, as are the losses.
Partners are free to make collective decisions on how those profits and losses are divided up.
Partners in a general partnership have unlimited and joint liability.
This means that, as individuals, they can be pursued for debts that the business holds because the business does not exist independently of the partners.
Liability is joint, with all partners being liable.
Partners in a general partnership are bound to enact particular fiduciary duties in order to be considered to be acting in the best interests of the partnership and its partners.
These duties are:
- Duty of Good Faith and Fair Dealing: This is the duty of a partner to act in a way that is fair, honest, and in good faith when acting in their role as a partner in the day-to-day work of their partnership.
- Duty of Loyalty: This is the duty of a partner to act in a way that does not hinder or undermine the success of their general partnership. They must put the interests of the general partnership ahead of their other business or personal interests.
- Duty of Care: The duty of care requires a partner to act reasonably and responsibly in the running and administration of the business. This might mean keeping detailed records or conducting appropriate auditing.
- Duty of Disclosure: This duty requires partners to be honest and to disclose any information they may have that could influence the course of the general partnership. This means disclosing anything a partner might know that other partners should be aware of to make informed decisions.
General partnerships are all pass-through entities, which means the business itself does not pay tax.
Tax obligations are paid by each of the individual partners as personal income, whether profits or losses.
Advantages and Disadvantages
A general partnership is a unique business structure with specific benefits and drawbacks that are best suited to a specific set of requirements.
|No major legal or registration process
|Unlimited liability, shared regardless of personal responsibility
|Flexible business structure and management
|Tax paid on personal income
|No annual reporting
|Must maintain good partnership relationships or the partnership can dissolve
General Partnership vs. Limited Partnership
A limited partnership is a similar system to a general partnership. However, one or more of the partners are limited in their capacity to conduct day-to-day business management.
The “limited” part of a limited partnership means that while one or more partners is called the general partner, they oversee the running of the business and its regular conduct.
Meanwhile, the limited partners are simply part owners who take no part in the regular running of the business.
General partners have unlimited liability in a partnership, but a limited partner only has limited liability according to the value of the business they own.
Related reading: Limited partnership vs. general partnership
LLC vs. General Partnership
A Limited Liability Company is an entirely different business arrangement from a general partnership.
An LLC is a separate legal entity in which the owners are referred to as “members”.
Members can be anyone; individuals, other businesses – even other LLCs. In most cases, a sole owner can have charge of an LLC as its only member.
An LLC is separate from its members, and as such it provides limited liability protection.
That means that the individual members are not able to be pursued by the LLC’s creditors – one of the significant features that separates an LLC from a general partnership.
In contrast, a general partnership is not distinct from its owners so does not provide that same limited liability cover.
Further, an LLC is a registered entity, whereas a general partnership is not.
How to Form a General Partnership
If you want to form a general partnership, get started by following these steps below.
- Choose your business name: Your general partnership needs a name to operate under, so you and your partner(s) will need to think of a suitable business name.
- Create a partnership agreement: This outlines the roles and responsibilities of the different partners and always includes their fiduciary duties. A verbal agreement is legal, but a written agreement is better.
- Obtain an Employer Identification Number (EIN): This is a specific partnership EIN for opening a business bank account.
- Open a bank account: The day-to-day running costs and profits of your business should be run from a business account.
- Secure licenses and permits: While you don’t need any licenses to establish a general partnership, you may require them to work in a particular field.
- Maintain annual reports and tax filings.
To speed this project up, you may also want to engage a business formation service like CorpNet!
Congratulations on reaching the end of this guide on general partnerships! Now that you know what general partnerships entail, you can make an informed decision as to whether it is the right structure for you and your business.
Is a general partnership a good idea?
Whether a general partnership is a good idea for you depends entirely on your personal needs and the needs of your business.
Who owns a general partnership?
The partners within a general partnership are all part-owners of the business and share in its profits and losses.
How does a general partnership work?
A general partnership works by having each of the partners involved in business decisions and the day-to-day running of the business.
They can also hire employees to aid in running the business.
If a general partnership fails, who is responsible for the debts?
The partners themselves are personally liable for any debts incurred by the general partnership.