Are you looking to start a business with a partner (or partners)? Are you more interested in an informal business structure, as opposed to following a more specific set of rules and regulations?
If so, you might be interested in a general partnership ― the most basic form of business for two or more people in the American business landscape.
Depending on your priorities and the unique needs of your business, the simplicity of the general partnership may be an advantage or a disadvantage.
Additionally, there are quite a few aspects of the general partnership that are rather clear-cut pros and cons. Do the advantages outweigh the disadvantages for your business, or should you shift your focus to another entity type for your company?
We put this article together as a way to discuss every angle of the general partnership with entrepreneurs like you. We hope it helps you decide whether the general partnership is the right choice for your company, or whether a different structure ― like a limited liability company or a corporation ― would be a better option. Let’s get started!
What Is a General Partnership?
Along with the sole proprietorship, the general partnership is one of the most no-frills American business entities, and there are very few rules and regulations regarding their formation or maintenance.
If you want to create a new general partnership, all you need is to find at least one person to partner with, and start doing work together.
You’ll often see people speak of the general partnership and the sole proprietorship in the same breath, and for good reason ― these business types are not considered by the government to be distinct legal entities from their owners. Rather, the general partnership and the sole proprietorship are treated legally as extensions of their owners’ personalities.
In other words, your general partnership is not a separate entity from you and your partner(s) as people.
The general partnership is so casual in its structure that it doesn’t even need a business name. In fact, many general partnerships operate under the individual names of its owners. For example, if your name is Sally Smith and you own a general partnership with Jane Johnson, you can simply refer to your business as “Sally Smith and Jane Johnson.”
What Are the Advantages of the General Partnership?
The most significant positive aspect for general partnerships is the lack of any sort of formation process.
Unlike limited liability companies, limited partnerships, and corporations, there is no document filing required to form a general partnership with your state government. In addition, you don’t have to pay a formation fee, which all of those other business entities are required to do. All you need to do to get a general partnership off the ground is simply start working with your partner(s).
Along those same lines, a general partnership is not required to complete any ongoing maintenance tasks either. Whereas more formal business structures typically need to file annual reports with their state ― and also often have to complete other compliance tasks like paying franchise tax ― general partnerships don’t have to worry about any of these things.
Another money-saving aspect of the general partnership is the fact that you don’t need to designate a registered agent or registered agent service for your business.
Formal business entities are required to have a registered agent or registered agent service to receive important document deliveries from the state and forward them to the company, which can often cost well over $100 per year. However, because of the informal nature of the general partnership, a registered agent is not required.
What Are the Disadvantages of the General Partnership?
While there are a few cost-saving measures that are definite positives for the general partnership, there are plenty of downsides as well.
One significant negative compared to formal business structures is the general partnership’s lack of limited liability protection. An LLC, LP, or corporation provides personal asset protection to its owners, which protects your car, house, personal bank accounts, and other personal assets in case of a lawsuit against your business. The general partnership has no such protection.
This means that if your business is successfully sued, your creditors can pursue your business assets as well as your personal assets. Obviously, this can be an extremely serious issue, and a significant lawsuit could bankrupt not just your general partnership, but also you and your partner(s) as individuals.
Another disadvantage is the general partnership’s lack of a unique business name. While a general partnership can acquire a doing business as (DBA) name, this does not give you exclusive rights to your chosen name. In fact, if another entrepreneur decides that they like your company’s DBA name, they can register a formal business entity with that name, which can then actually prevent you from using it anymore.
General partnerships also can’t be operated by one person by themselves, but rather need at least two people to function. This is in contrast to the limited liability company, which can be operated as either a single-member LLC or a multi-member LLC and is extremely easy to set up through a formation service or on your own.
How Is a General Partnership Taxed?
The general partnership is a “pass-through” entity for taxation purposes, so there is no tax paid on the business level, and there’s no corporate tax return to worry about. Instead, the general partnership’s profits and losses pass through the business entity to its owners, and those individuals then claim that money on their own personal taxes.
Because the general partnership is considered to be a form of self-employment, you will need to pay self-employment taxes on any income earned through your business. Self-employment tax encompasses both the employer and employee portions of Medicare and Social Security, which comes to a total of 15.3%. This amount is in addition to your income tax responsibilities.
The only tax obligation for the general partnership itself is the statement of information required by the Internal Revenue Service. This document informs the IRS of your general partnership’s net income for the year, and it lets them know how much tax money they can expect from you and each of your partners.
What Is a General Partnership Agreement?
A partnership agreement is not a legal requirement in any state, but we strongly recommend it for anyone looking to start a general partnership. This document is a contract between the partners that own your business, and it can help you set forth some rules and regulations for how you would like your business to operate.
Among the elements you’ll often see in a general partnership agreement are a statement of purpose, guidelines for contributions and distributions, accounting processes, adding new partners, and voting procedures.
This document can be incredibly helpful if there’s ever a dispute between you and your partner(s), because as long as you prepare it correctly and have every partner sign it, the general partnership agreement can be legally enforced.
How Is a General Partnership Managed?
In most general partnerships, the partners each take on an equal share of the managerial aspect. However, if you want to use any other management style, the unofficial and unincorporated nature of the general partnership allows you to do whatever you please.
If you would rather have one partner handle all of the daily management tasks, or create some sort of uneven split, you are free to do so. We will note that you should write down your choice in your general partnership agreement, but other than that, there aren’t really any set rules.
When it comes to American business structures, the general partnership is as simple as it gets. There is no formation process, and there aren’t any ongoing maintenance requirements to adhere to either. If you want the ultimate in casual flexibility for a business with multiple owners, the general partnership might be a good choice for you.
On the other hand, the lack of legal protections for general partnerships can be a major drawback. The general partnership doesn’t offer personal asset protection, and you can’t secure the rights to a unique business name with this type of business either — both things that can easily be done by forming an LLC through a service like LegalZoom + Zen Business.
Still, if your priority is to form the most basic business possible, with as few rules and regulations as you can find, the general partnership can certainly provide those aspects.