General Partnership

What is a 'General Partnership'

A general partnership is an arrangement by which two or more persons agree to share in all assets, profits, and financial and legal liabilities of a business. Such partners have unlimited liability, which means their personal assets are liable to the partnership's obligations. In fact, any partner can be sued for the entirety of a partnership's business debts.

Breaking Down 'General Partnership'

The benefits of a general partnership include the flexibility to structure a business as one sees fit, and the ability to control its operations more closely. Compared to a corporation, with its levels of bureaucracy and red tape, a general partnership offers each partner the ability to participate in the management of the business. For a general partnership to be established, the following should be met:

  • The partnership must include at least two people.
  • All partners must agree to any liability that their partnership may incur.
  • Ideally, there must be proof that such an agreement exists, such as in a formal partnership agreement. General partnerships may be formed orally, however.

General Partnership Features

In a general partnership, each partner has agency powers, which means that any partner can enter into a binding agreement, contract or business deal that each partner is obliged to adhere to. This can lead to disputes, however, so successful general partnerships often have a dispute resolution system build into their partnership agreements. Decision-making within general partnerships may be achieved by majority vote or may be awarded to a single partner or non-partner appointee, who can manage the partnership similar to a company board of directors. Since all partners have unlimited liability, even innocent partners can be held responsible when another partner commits inappropriate or illegal actions.

General partnerships usually are dissolved when one of the partners dies, becomes disabled or leaves the partnership, though provisions can be written into an agreement that provide guidance in case of such events (such as transferring a deceased partner's interest to surviving partners or a successor).

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 a general partnership.

General Partnership Advantages

Compared to setting up a corporation, limited liability partnership (such as an LLC) or other business structure, establishing a general partnership tends to cost very little and requires far less paperwork. In the United States, filing limited partnership paperwork with a state is generally not required, though a local business registration, or appropriate permits or licenses may be necessary.