What Is a General Partnership?
A general partnership is a business arrangement by which two or more individuals agree to share in all assets, profits and financial and legal liabilities of a jointly-owned business structure. Such partners agree to unlimited liability, which means either of their personal assets may be liable to the partnership's obligations. In fact, any partner may be sued for the entirety of a partnership's business debts.
This potential liability from an unlimited liability arrangement is therefore not capped and can be paid off through the seizure of an owner's personal assets. Furthermore, partners are responsible for their own tax liabilities—including money earned from the partnership—on their personal income tax returns, as taxes do not flow through the general partnership itself.
Understanding General Partnerships
General partnerships offer participants the flexibility to structure their businesses however they see fit, giving partners the ability to control operations more closely. This allows for more swift and decisive management, compared with corporations, which often must slog through multiple levels of bureaucracy and red tape, which complicates and slows down the implementation of new ideas.
A general partnership must satisfy the following conditions:
- The partnership must minimally include two people.
- All partners must agree to any liability that their partnership may incur.
- The partnership should ideally be memorialized in a formal written partnership agreement, though oral agreements are no-less legally valid.
General Partnership Features
In a general partnership, each partner has the agency to unilaterally enter into binding agreements, contracts or business deals, and all other partners are consequently obligated to adhere to those terms. Not surprisingly, such activities may lead to disagreements, and so many successful general partnerships build conflict resolution mechanisms into their partnership agreements.
In some cases, the partners agree only to proceed with major decisions, if there's either a complete consensus or a majority vote. In other cases, the partners designate non-partner appointees to manage the partnerships, similar to a company's board of directors. In any case, a broad agreement is essential because when all partners have unlimited liability, even innocent players can be fiscally on the hook, when the other partners commit inappropriate or illegal actions.
General partnerships typically dissolve when one of the partners dies, becomes disabled or exits the partnership. Provisions may be written into an agreement that provides directives for moving forward during these situations. For example, the agreement may stipulate that the deceased partner's interest is transferred to the surviving partners or a successor.
Benefits of General Partnership
The cost of creating a general partnership is considerably cheaper than setting up a corporation or a limited liability partnership like an LLC. General partnerships likewise involve substantially less paperwork. Case in point: In the United States, filing limited partnership paperwork with a state is generally not required, though certain registrations forms, permits and licenses may be necessary at the local level.