When you operate a business with a partner, having a formal legal partnership agreement laying out each person’s responsibilities and liabilities is vital to operating smoothly. All partners can share liability and business responsibilities equally. Still, it’s important to define this relationship carefully in order to later avoid potential conflict. If you are considering setting your business up as a general partnership, a corporate lawyer from the Priori network can help you decide if a general partnership is the best option for your unique situation and get you on your way to a working partnership agreement.
Understanding General Partnerships
A general partnership is a for-profit, non-corporate business entity created by a mutual understanding between two or more parties. These partners work together towards a shared purpose through some arrangement. While most partnerships have partnership agreements that specify each partner’s share and responsibilities and are formally constituted through processes dictated by state law, they can be incredibly informal as well. Some businesses operating without a written operating agreement are deemed de facto general partnerships.
No matter how formally defined, general partnerships share three main characteristics.
- Each partner shares unlimited personal liability for the business obligations.
- Each partner has full management powers and can commit the business to contracts or carry out other business operations.
- Each partner is individually taxed for his or her share of the profits, as the partnership only serves as a pass-through entity.
In fact, a general partnership largely operates as two or more self-employed persons acting in concert, except that any partner can be held financially responsible for the wrongdoings or mistakes of the other.
Advantages of General Partnerships
There are three main advantages to a general partnership:
- Ability to Deduct Losses. For many general partners, their small business can be a financial drain when starting out. Since partners are taxed directly for the profits or losses of the business, they can deduct losses on their personal income taxes.
- Simplicity. Because they have very few requirements to set up and operate, general partnerships can be much easier to create than other types of businesses.
- Flexibility. General partnerships are incredibly flexible. So long as the operations and other issues are set out in a written operating agreement or contract between partners, almost any structure and procedures can be established.
Disadvantages of General Partnerships
The main disadvantage of a general partnership is that liability is unlimited for each person involved. This can be quite risky, especially as the company grows. Generally, only incredibly small operations or family businesses are willing to take on this risk. In addition, it can be difficult to secure outside investment into general partnerships due to this high level of liability and potential risk, even when covered by proper insurance.
If, for whatever reason, you and your partners decide that a general partnership is the best structure for your business, a corporate lawyer can help you draft a partnership agreement (and perhaps also a buy-sell agreement). Depending on your needs, the price of drafting these documents can vary dramatically. When you work with a Priori lawyer, flat fee packages for partnership agreements typically range from $500-$6000. In order to get a better sense of cost for your particular situation, put in a request to schedule a complimentary consultation and receive a free price quote from one of our lawyers.
Can general partnerships have employees?
Yes, just like any other legal business entity, general partnerships can employ staff with no financial stake in the partnership through standard employment contracts, as well as carry out any other business activities, so long as they are formally created under state law.
What’s the difference between general partnerships and limited partnerships?
In general partnerships, all partners have unlimited liability beyond their financial investment in the partnership. In limited partnerships, certain partners are limited partners, that is, they have limited liability and no direct participation in the management decisions or business operations of the company.