Start a Company > Forming a Legal Entity > Partnerships
General Partnerships

Forming a Business Partnership

General Partnerships

In a general partnership, business partners pool their talents and resources. But that's not the only reason entrepreneurs turn to general partnerships for their business entity form.

The concept of a general partnership sounds reasonable: Two or more individuals join forces for the ownership and operation of a business.

But are partnerships really as easy as they seem? And what kinds of complications can you expect to encounter when you decide to share your business with someone else?

To form a general partnership, all you need are two (or more) people who agree to co-own a business. Believe it or not, you don't even need a written agreement -- a verbal agreement is all you need to get a general partnership up and rolling.

But from a business standpoint, you need to consider both a written general partnership agreement and a whole lot of other things before you decide to transition your business model to a general partnership structure.

Shared Ownership

Before you agree to form a partnership, you need to know exactly what you're getting into. Shared ownership can be both blessing and a curse. It's nice to have a partner who shares responsibility for the business. But it's not so convenient when that same partner wants to make big changes or share in the decision-making process. Hold off on forming a partnership until you are completely sure you can make it work with your prospective partner.

Unlimited Liability

One of the drawbacks of a sole proprietorship is that it exposes the owner to unlimited liability. If something goes wrong in the business, the sole proprietor can be held personally responsible. Although certain types of partnerships can limit your liability, in a general partnership each partner remains fully liable for the business. The only benefit is that now the business owner's liability is now shared with at least one other person.

Taxation

General partnerships resemble sole proprietorships in that they both experience "flow through" taxation. Profit and loss are distributed entirely to the partners, and reported on their personal income tax returns rather than being reported on a separate return for the partnership. Interestingly, the distribution of revenues and expenses is not required to be uniform for each partner and can vary in accordance with the partnership agreement.

Termination

The partnership's conditions of termination should also be discussed in the partnership agreement. However, the termination of a general partnership can also take place under certain default conditions. For example, death, disability or withdrawal from the partnership are among the circumstances that can automatically terminate a general partnership.