General Partnership: Pros and Cons
Like the sole proprietorship, the general partnership is a default business entity. In this case, a general partnership is automatically formed any time two or more people form a business together. There is no paperwork required to form a partnership; all it takes is two people (or three, or four, or…) agreeing among themselves to start a business together. While it is highly recommended for business owners to draft a partnership agreement outlining important details of the business’s organization, operation, and partner roles, there is no legal requirement.
As with the sole proprietorship, a general partnership is tied to the partners, for better or for worse.
- Easy to create and maintain. There is no need to formally file with the state, and most states have no required maintenance activities. Be aware, however, that you still have to follow all local requirements. Contact your city and county officials to find out if there are additional requirements you need to know about.
- Pass-through taxation. The profits from the business pass through to the owners’ personal tax returns; there is no separate filing for the business itself.
- Unlimited liability. Any losses or obligations incurred by the business are inseparable from the partners as individuals. If creditors or lawyers come after the business, they have unlimited access to the partners’ personal assets.
- Limited life. A general partnership is defined by the partners; absent a partnership agreement spelling out survival procedures, the partnership is terminated when any one of the partners dies or leaves the business.
- Instability. Because there are no requirements for organizing and planning details of a partnership, many partnerships ignore them, and get by on an oral agreement and a handshake (if that). This can lead to all kinds of conflicts between the partners, with no legal agreement to settle the dispute.
Do you have questions about entity types? Download our free incorporation guide.