Setting up shop as a general partnership is one of the quickest and easiest ways to go into business with another person. A general partnership is an agreement between two or more people to work together to make a profit. The partners remain personally responsible for all business activity. In most states, you do not have to register a general partnership with the secretary of state or similar state business registration office.
General Partnerships Operate by Agreement
One of the benefits of operating a business as a general partnership is management flexibility. A general partnership is managed through a private agreement between the partners. Generally, state law allows an oral or written partnership agreement to address most ownership and management issues. The agreement has the force of a binding contract. State laws outline default management procedures that go into effect if the partners do not adopt a partnership agreement.
General Partners Are Personally Liable
A general partnership operates like a sole proprietorship, but with multiple people involved. Each partner is personally responsible for the actions of the business, the other partners, and the partnership's employees. A business creditor, for example, can try to recover a judgment against business assets and the personal assets of each partner involved. Unlimited personal responsibility is one of the drawbacks of doing business as a general partnership.
Each General Partner Has the Right to Manage
Each general partner has an unrestricted right to manage the business. Even if a general partner owns less of the business than another partner, that partner's right to manage the business remains equal - unless the right is restricted in the partnership agreement. For example, a general partner can take out a loan against the business or sell assets without telling the other partners.
General Partnerships Are Not Taxed as Separate Businesses
The Internal Revenue Service (IRS) does not require general partnerships to pay income taxes. Instead, the business reports its activities to the IRS on an informational tax return and passes its profits and losses through to the partners. Each partner reports his share of partnership profits and losses on his individual tax return and pays taxes on the amounts at the individual tax rate. This way, business income is taxed once at the individual level instead of twice at the business and individual levels. This pass-through tax treatment is one of the benefits of the general partnership business structure.
A Business Lawyer Can Help
The law surrounding creation of a general partnership is complicated. Plus, the facts of each case are unique. This article provides a brief, general introduction to the topic. For more detailed, specific information, please contact a business lawyer.