General Partnership

If you have a great idea to open a business and a well-thought-out plan, it’s time to make it real. But first of all you should decide on the business structure, because that is what determines the effectiveness of your company. 

One of the simplest forms of business is the general partnership. As with the sole proprietorship, there is no formation process or any other requirements. You also do not need to pay registration fees or hire a registered agent. Strictly speaking, a general partnership is an informal business structure that allows you to start a business without forming a business entity or registering it.

Before you start acting, you need to figure out if a general partnership is right for you or whether you should form a different style of business entity. In this article we will look at pros and cons of operating a general partnership, and also learn about its specifics. 

What Is a General Partnership?

A general partnership is a basic entity structure that unites two or more people to do business together. It can be friends, family members, relatives and there are almost no restrictions.

Legally, the general partnership is not a formal business entity like a corporation or an LLC. It is a casual form of business that is unique and has its main purpose to start working quickly, with a minimum of formalities. There are no government formation fees, maintenance fees to pay or any incorporation documents. And even the name of the partnership usually corresponds to the personal names of its founders. 

There are two types of partnership, which aspiring entrepreneurs often confuse:

• General Partnership;
• Limited Partnership.

These business structures do have a lot in common, but the main difference is the status and functions of the partners.

1. In the general partnership, all partners are equal. Each of them has an opportunity:

• To make business decisions and even legally bind the company in contracts;
• To operate a general partnership for the day-to-day management of the business.  As a rule, the particular authorities of each of the participants are described in the partnership agreement.

2. A limited partnership usually distinguishes between a general partner and a so-called “silent partner”, i.e. a person who is not involved in the everyday life of the partnership. More often than not, it is the investor. The limited partner does not have decision-making power in the company without the approval of the general partner. 

Pros and Cons of the General Partnership

Pros

1. Easy to form and maintain: establishing a partnership involves no formalities, such as filing documents with the government or paying mandatory registration fees. In other words, you can simply do your business. Moreover, since the partnership is not a formal business entity, there is no requirement to file an annual report in this case;
2. No registered agent needed: it is mandatory for all officially registered business entities to have a registered agent. However, partnership has no registered agent requirement, due to the fact that it is not a separate entity, but a way of doing business;
3. Simplified taxes: by default, general partnerships are treated as pass-through tax units, which allows them to avoid double taxation;
4. Easy to dissolve: if you decide that you no longer want to do business as a partnership, you can terminate it in an easy way. All you have to do is follow these consecutive steps:

• Notify the IRS and your state (not necessary, but advisable);
• Let your creditors, customers and vendors know.

Cons

1. No personal asset protection: unlike an LLC or corporation, a partnership does not provide its members with personal assets protection. In case of a lawsuit against the business, creditors will have access not only to the assets of the partnership, but also to the personal assets of its owners;
2. Self-employment taxes: members of the general partnership must pay self-employment tax, the rate of which is 15.3%. This includes the employer and employee shares of Medicare and Social Security tax, but that’s not all. You may have to pay additional income taxes;
3. No business name exclusivity: partnerships are usually called by the names of their members. However, if you want to do business under a different name, you can register a doing business as (DBA) by getting a fictitious name. Note that a DBA does not give you any exclusive rights, so other companies may use it as well. If you don’t like this option, then consider forming an LLC or corporation. In that case, the business name is exclusively reserved for your company;
4. No taxation options: according to state law, an LLC or a corporation has the right to choose its own tax treatment. There are no variants for the general partnership. In this case, it is taxed as a pass-through entity, i.e., the income is taxed only when it is distributed to the participants, avoiding the level of the partnership itself.

What Is a General Partnership Agreement?

It is optional to have a general partnership agreement. But a written contract between the partners can help settle potential disputes and make sure in advance that your business is organized in a proper way.

Generally, a partnership agreement regulates the distribution of income and losses, as well as the obligations of the general partnership. It includes the following main elements:

• Statement of purpose;
• Plans for financial contributions and distributions;
• Accounting guidelines;
• How to add new partners;
• How to remove a partner;
• Voting processes.

Depending on the specifics of your business, this information may vary. 

The completed document should be stored with the rest of the paperwork. There is no need to notarize or file a partnership agreement with a specialized government agency for approval.

Is the General Partnership the Right Business Entity for Me?

You should be careful when choosing a form of your business. It is the heart of your future business. Before making a decision, you would better consider all the options available. 

Despite the simplicity and accessibility, to operate businesses as a general partnership has its pitfalls. Although you can save some up-front money due to the lack of official registration, the risk of doing business without the personal asset protection can be much more expensive.

Of course, every business is unique, and in some cases the general partnership is a really good choice. For example, if you are operating on a very small budget. However, in most cases, obtaining limited liability is worth the expenses associated with setting up an LLC or corporation.

In Conclusion

Starting a business as a general partnership is the cheapest and easiest business type available to everyone. As with the sole proprietorship, you do not need to file any incorporation documents or pay mandatory fees. Additionally, you can also save money on the services of a registered agent. 

On the other hand, there are significant disadvantages such as:

• Inability to get any personal asset protection, such as real estate, cars, and bank accounts of partners;
• There is no exclusivity regarding business names, as a result your name can be used by other companies.

To sum up, the general partnership has its economic, administrative and tax advantages. However, the main disadvantage of this form of business is the lack of a corporate veil between the assets of the company and the personal assets of the partners. This can be improved by changing the business and forming an LLC, but it’s up to you to decide which option is better.