A General Partnership: Advantages, Disadvantages, and Methods of Establishment

A general partnership is an unincorporated business with two or more owners who share business responsibilities. This type of partnership exists by default when two or more people go into business together with the goal of earning a profit.

The founding date of a general partnership is the point in time when the partners commence their joint business activities, usually marked by the conclusion of a partnership agreement. This agreement outlines the governing structure of the business, each owner's rights and responsibilities, and may specify different areas of responsibility and privileges for each owner.

General partnerships don't pay business income taxes; instead, the income and losses are passed through to the individual partners. As a result, partners are responsible for paying taxes on their share of the partnership's income. Each owner reports their share of the partnership's income and losses on their personal tax return and pays the taxes accordingly.

One of the key features of a general partnership is the shared liability among partners. Partners face joint liability for partnership debts and obligations, and some states may also have joint and several liability. This means that each partner is responsible for the full amount of the partnership's debts and obligations, and creditors can pursue any partner for the entire debt.

Partners' actions or mistakes can affect each other legally and financially. Moreover, each partner can enter into contracts or business deals that are binding on every other partner, which can lead to potential conflicts and legal issues.

In a general partnership, partners can be held liable for the actions of other partners, including employees. This unlimited personal liability can make general partnerships risky for businesses that are too large or complex. As a result, limited partnerships can be a good option when pooling the resources of multiple people or when a few partners bring capital to the table.

In a limited partnership, there are two types of partners - general partners and limited partners. General partners have unlimited personal liability for business debts and obligations, but limited partners are only responsible up to the amount of their investments.

General partnerships are simple to start and file taxes for. However, it's important to have a founders' agreement that delineates the rights and responsibilities of each owner, particularly in a general partnership. This agreement can help prevent potential conflicts and legal issues down the line.

It's also crucial to note that general partners report their share of business profits and losses on their personal tax return. The partnership must complete and provide a Schedule K-1 to each owner no later than March 15 each year. Income for general partners is usually treated as self-employment income, subject to self-employment taxes for Social Security and Medicare.

Under RUPA (Revised Uniform Partnership Act), all partners have equal voting rights and profit shares, even if one partner contributes more resources or money to the company. However, if a partner breaches a fiduciary duty, the other partners can sue.

General partnerships dissolve when one of the partners passes away, becomes disabled, or leaves the partnership without a partnership agreement specifying otherwise. In such cases, the remaining partners must decide whether to dissolve the partnership or continue operating.

In conclusion, general partnerships can be a suitable choice for small businesses with a few partners who are willing to share liabilities and responsibilities. However, it's essential to understand the risks and potential liabilities involved before starting a general partnership. Consulting with a legal professional can help ensure that you have the necessary protections in place to safeguard your personal assets.