In this type of business, two or more partners share ownership and management responsibilities.
A general partnership is easy to set up and operate, and has less legal requirements than other types of businesses like corporations or limited liability companies (LLCs).
How Does a General Partnership Work?
In a general partnership, each partner has an equal say in the management of the business and contributes equally to its operation.
Partners can make decisions about the business by unanimous agreement or by majority vote. Each partner also has the right to inspect and copy any books and records of the partnership.
In detail, a general partnership has the following conditions:
- The partnership is formed by at least 2 people
- The partners involved in the partnership come into a contract to agree that all of them are liable equally to any obligation that the partnership business will incur.
- A formal written partnership contract or agreement binds these agreements further although even an oral agreement is also valid.
Advantages of a General Partnership
There are several advantages to forming a general partnership:
- Partners are personally liable for the debts of the business.
- Partners can agree to share profits and losses equally, or they can allow each partner to keep what he earns.
- All partners have access to all records of the partnership business.
- Partners can vote on major decisions regarding their business’s future, such as selling or changing locations.
- There are very few restrictions of activities that a general partnership may engage in, meaning it is easier to get started compared to other businesses entities like corporations or limited liability companies (LLCs).
- The organization is simple and easy to operate with fewer legal requirements than other types of incorporated businesses like corporations or limited liability companies (LLCs).
Disadvantages of a General Partnership
There are also several disadvantages to forming a general partnership:
- Partners are liable for the debts of the business, even if they were not involved in incurring the debt.
- The partnership is not a separate legal entity, so it does not have its own legal standing. This means that the partnership can’t sue or be sued and cannot own property in its own name.
- Partners are not protected from personal liability for actions taken by other partners in the business.
- The agreement between partners is often oral and not written down, making it more difficult to prove in court if there is a dispute.
- A partner can be forced to sell his share of the business at any time.
How to Form a General Partnership
To form a general partnership, partners typically enter into an oral or written agreement that dictates how they wish to run their business and what each partner’s responsibilities are.
An attorney can be helpful in creating the document that details this agreement, but it is not required for all partnerships.
The following steps may be taken in forming a general partnership:
Choosing a Business Name
A business name for a general partnership can simply be the name of the partners, such as “Smith and Jones General Partnership.” The name can also include a trade name (the name under which the business will conduct its operations), provided that it is registered with the state.
Registering With the State
In order to register a general partnership with the state, the partners must file articles of organization with their secretary of state’s office. This document will include basic information about the partnership, such as the names and addresses of the partners, the business name, and the purpose of the business.
Creating an Operating Agreement
An operating agreement is not required for all partnerships, but it is a good idea to have one in place. This document will outline how the partnership will be run, including how profits and losses will be shared, how decisions will be made, and how disputes will be resolved.
Partnership taxes are also covered in the operating agreement.
This document should be updated as needed to reflect any changes in the partnership.
Signing the Partnership Agreement
A partnership agreement can be oral or written, but it must include the names and addresses of the partners as well as their percentage of ownership in the business.
All partners should review and sign the document to indicate their consent to its terms.
Securing Licenses, Business Permits, and Zoning Clearance
Depending on the business, additional licenses, permits, and zoning clearances may be needed in order to operate. For example, a business that sells products would need a seller’s permit from the state, while a restaurant would need a food handler’s permit.
It is important to check with the appropriate agencies to determine what is required for your specific business.
Obtaining an Employer Identification Number (EIN)
All businesses, including partnerships, are required to have an EIN. This is a nine-digit number that is used to identify the business for tax purposes.
The EIN can be obtained from the IRS website.
A general partnership is a simple and easy way for two or more people to start a business together. The advantages include personal liability protection for partners, shared profits and losses, access to all records of the partnership, and voting rights on major decisions.
The disadvantages include partners being liable for the debts of the business, no legal standing as a separate entity, no protection from personal liability for other partner’s actions, and the possibility of being forced to sell one’s share of the business.
General partnerships are not for everyone, but they are still the most common type of business ownership. When deciding to form a general partnership, it is very important that all partners read and understand their legal responsibilities to the business.
Disclaimer: The above references an opinion and is for information purposes only. It is not intended to be investment advice. Seek a duly licensed professional for investment advice.
About the Author
True Tamplin, BSc, CEPF®
True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.
True is a Certified Educator in Personal Finance (CEPF®), a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.