We offer free business start-up consultations.
A General Partnership is the most simplistic type of legal structure designed for the situation in which two or more people are collaborating in some type of business activity. The entities involved in a partnership can be individuals, corporations, or trusts. By default, the profits and losses generated by a General Partnership are shared equally among its partners. However, typically a partnership agreement is created to further define the rights, responsibilities, and duties of each partner, as well as the terms of perpetuity if one of the partners withdrawals from the partnership. Financial responsibility is shared equally among the partners, with each partner jointly and severally liable for all business debts and obligations which means that the partners are jointly liable for any and all legal claims against any of the partners. The taxation of a General Partnership is calculated at the individual level.
Advantages of a General Partnership
- Easy to Establish
- Simplified Tax Filing
Upfront, a General Partnership is relatively easy to establish. The paperwork is limited and is only slightly more complicated than the paperwork required for a Sole Proprietorship. One of the most significant benefits of a General Partnership is simplified tax filing, since no corporate forms or double taxation is required. Each partner files a U.S. Return of Partnership Income (IRS form 1065). This form dictates the partner’s responsibility for the profits and/or losses of the General Partnership, which are then claimed by the partner on his or her U.S. Individual Income Tax Return (IRS form 1040).
Disadvantages of a General Partnership
- No Separate Business Entity from Partners
- Partners’ Personal Assets Unprotected
- Partners Liable for Each Others’ Actions
- Partnership Terminated Upon Death or Withdrawal of One of the Partners
However, the wide array of disadvantages of a General Partnership is what makes it arguably one of the worst organizational business structures available. Because of the lack of corporate structure, a General Partnership does not establish any kind of separate business entity from the partners. This means that the partners are totally unprotected from any litigation against the business, and their personal assets can be seized at any time to cover the unmet obligations of the business. Even worse, each partner is liable for the actions of the others on behalf of the business. So if one of the partners was to execute an agreement without the knowledge of the others, each partner would become equally obligated to the terms of that agreement. The same is true for credit obligations. If any of the partners secure credit on behalf of the business, each partner would become equally obligated to the terms of that debt. In addition, without a Partnership Agreement, there is no guarantee of perpetuity for a General Partnership if one of the partners dies, becomes disabled, or withdrawals from the business.
Recommendations for a General Partnership
Like a Sole Proprietorship, a General Partnership is ideal for a small business with virtually no employees and no future plans to hire, no property, little income, and only moderate growth expectations. This type of organizational business structure is suited for a small business that involves a partnership between more than one owner.
Formation of a General Partnership
Partnerships are the only type of business entity that can be formed by a handshake or oral agreement. However, in order to avoid any potential disputes leading from misunderstandings, it is important to treat a Partnership just like any important legal relationship and make sure it is memorialized with a written Partnership Agreement.