Creating a business alone can sometimes be intimidating. Partnering with someone can seem like a great way to share the burden and profits altogether. But if you have decided to partner with someone in your business, you need to know what it means, beginning with the fact that there are various partnerships. Below we are talking about the most common partnership, i.e., The General Partnership.
What is a general partnership?
Partnerships are the most popular business structure for businesses having more than one owner. A general partnership is usually established for profit between two or more people, partnership, corporations or associations who commit to sharing ownership, profits, management and liabilities of a business venture. The partners serve as the co-owners of the business. It is the easiest, straightforward and least expensive to form. In this partnership, all the partners have unlimited liability for the business debts. Each partner ought to contribute something to the business. It can be either property, funds, labor, skills or any involvement that benefits the business. Hence, both the partners share the responsibilities and the benefits of the business together.
To properly form a partnership, it is necessary to meet the following conditions:
- It should include two or more individuals, corporations or associations.
- A Partnership Agreement should be made stating all the conditions that need to be satisfied by both the partners.
- All the partners should agree to any liability that their partnership may face.
Characteristics of General Partnerships
Easy, Quick and Inexpensive
To form a general partnership, two or more persons needs a contract that can be either a verbal agreement or a written agreement (it is more preferred as it is safe & secure)
Not a separate entity
Partnerships may hold title or sue or file income tax returns, but there is no limitation on liability accumulating against any of the partner’s assets.
In a general partnership, you express contract of the owners or implied contract in law by the courts.
Each partner can make the decision for the benefit of the business without any meetings or resolutions.
Usually general partnerships have limited life. They can be dissolved or reformed upon death or incompetency of any partner.
All the partners have unlimited liability for partnership obligations. It means that the partners can be held individually liable for all business liabilities and debts, including court judgments and financial commitments.
In a general partnership, a partnership return is filed, but profits are taxed as income to both the partners and not at the partnership level.
Advantages of General Partnership
The biggest benefit of a general partnership is the tax advantage. Organizations structured as partnerships don’t pay income tax. Rather, all the profits and losses from the business are passed through to the individual partners. The general partnership still needs to file a tax return which states all the business’s profits and losses. The partners are required to file tax returns stating their share in the company’s profit and loss.
Less paperwork & Easy to Form
It is simpler to create a general partnership as it requires less paperwork and is inexpensive. However, it is advisable to file a partnership agreement before starting the business. The partnership agreements should clearly state the purpose of the business and the obligations of each partner. It is a legal proof of the existence of the partnership. It acts as the guideline of rules that should be followed by the partnership. You can always include the following information in the partnership agreement:
- Partnership name and address
- Names of all partners
- Effective date
- Purpose of the partnership
- Voting requirements for business decisions
- Costs, based on percentage, of each partner
- Information about financial, auditing, and profits
- Sharing of profits
- Expected contributions of all the partners along with the deadline for the completion of contributions
- The procedures required if any partner withdraws from the partnership
- The procedures required to dissolve the partnership
You can always consult an attorney if you are not sure how to create a partnership agreement.
In a general partnership, any member can decide without any meeting or resolutions for the benefit of the business.
Disadvantages of General Partnership
Easy to Dissolve
If any formal agreement is not generated at the time of creation of general partnership it can be dissolved easily. Obviously, there is always a protocol to wind up and close the business, but that process is much easier in the sense that there are on required filings.
In a general partnership, all partners are responsible for legal issues and business debts that arise. There is no legal protection since you do not incorporate the business into an independent legal entity. This vulnerability to liability is apparently one of the biggest downsides to a general partnership, so it is important to be sure with the products, contracts, disclaimers, and so on.
It is easy for questions of reimbursement to arise since partners can proceed with investments from their personal finances and later on, the money invested is owned by all partners. There may be chances that one partner didn’t want the company to use that money and likewise doesn’t want the company to pay it back. The similar issues can arise with the acquisitions for the company or even regarding the decisions on which clients or suppliers can take on. Having all partners, with equal responsibility and power can cause obstacles unless proper guidelines are set out.
If it is your first business and you have no idea where you’re going with it, a general partnership can act as a huge asset. A general partnership can make matters delicate. Hence, it is always advisable to avoid problems down the road by consulting an attorney at the beginning and ensuring your partnership gets off to a good start.