Partnerships

A partnership is a business owned by more than one person. There are several different types of partnerships, each with different characteristics, benefits, and possible disadvantages. A general partnership is the simplest form of a partnership. Generally, if a business is referred to simply as a “partnership,” it is a general partnership.

General Partnerships Are Easy to Form

A business with two or more owners can be a partnership. Much like a sole proprietorship, forming a general partnership does not require filing any documents or taking any specific action. If you and another person simply run a business together, it is a general partnership by default. General partnerships differ in this regard from limited partnerships (LPs) or limited liability partnerships (LLPs), since forming one of those businesses requires documents to be filed with your state’s Secretary of State or appropriate agency. Also, many states require general partners to register their business’ name and pay taxes, even though the entity is technically formed without any formal process.

General Partnerships Give Joint Authority and Impose Joint Liability

A general partnership can be thought of as an equal split between the partners. This offers benefits and possible disadvantages. Each partner has joint authority to act on behalf of the others, giving the entity a flexibility that other types of business structures do not have. Thus, one partner is free to contract with customers, suppliers, or other parties without the need for explicit approval from the other partners. However, since general partners share joint liability, contracts can be enforced against any of the partners. General partners may be held personally liable and are not offered the protections of a limited liability company (LLC) or LLP. It is therefore important to form a partnership only with people whom you trust.

Similarly, each general partner has an equal right to the profits and losses of the business. In the absence of an agreement that states otherwise, this is true no matter how much effort, capital, or other resources each partner puts into the business. If one partner chooses to leave the partnership, it is usually dissolved. The business must be re-formed between the remaining partners or run as some type of single-owner business if no partners remain.

For these reasons, it is a good idea for partners to create and agree to a partnership agreement. Even if it is not filed with the agency that regulates business in your state, a partnership agreement acts as a contract between the partners by outlining how profits are shared, how losses are accounted for, and how the business will be run. Having a solid partnership agreement in place may help avoid unnecessary conflict between partners.

Taxes Pass Through to General Partners’ Personal Returns

The tax on a partnership passes through to the general partners, meaning they pay taxes for the business on their personal tax returns. In this way, general partnerships are similar to LLCs or S-corporations. A tradeoff to this benefit is that partners must usually pay the self-employment tax and quarterly estimated taxes. Be sure to consult a tax professional if you are unsure about the taxes you may owe due to your general partnership or other business.