If you're going into business with someone, you might consider structuring your company as a general partnership. This is a type of business agreement made between two or more individuals who agree to share all assets, profits and liabilities of the business.
Because of its simplicity and tax benefits, a general partnership is one of the most common legal business entities. However, it's important to note that each partner is personally responsible for the business, including debts and lawsuits, and is held liable for the actions of their partner(s).
Below, we examine the main benefits and disadvantages of a general partnership and outline whether this type of business structure is right for you.
[Read: 5 Steps to Starting a Business in a Few Hours]
Benefits of a general partnership
Going into business with another person (or more) is already very advantageous. After all, two heads are better than one, and having a business partner can double your resources, availability and reach. Here are three key benefits of a general partnership:
Easy to establish. Similar to establishing a sole proprietorship, you don’t need to file any forms with the state to start a general partnership; all you need is a verbal agreement with your partners. Because you don’t have to file paperwork, setting up a general partnership is relatively inexpensive.
Simplified taxes. General partnerships benefit from pass-through taxation, where taxes on the business’ profits or losses pass through the business entity directly to the business owners’ personal taxes. Other business structures, like corporations, must pay taxes twice — first on a business level, and second on a personal level.
Easy to dissolve. In the event business owners need to close their business for any reason, such as one partner files for bankruptcy or one wants to retire, dissolving a general partnership is easy. To dissolve the partnership, take these steps:
- Notify federal tax authorities and your state.
- Submit a dissolution and liquidation form to the state in which you do business (this is not required but is a recommended precaution).
- Alert any and all possible creditors of the dissolution so that you will not be responsible for any additional debts.
- Let your customers and vendors know.
If you are going into business with another individual you know and trust, a general partnership might be a good solution for your business.
Disadvantages of a general partnership
Although general partnerships have strong advantages, there are disadvantages to consider before forming this type of legal entity. These are the two main disadvantages of a general partnership:
Personal assets aren’t protected. Unlike corporations, general partnerships are not considered separate business entities. This means the partners are not protected from lawsuits brought against the business. Additionally, personal assets may be seized to cover unpaid debts.
Partners are liable for each other. Each partner is liable for the others’ actions and debts, which makes it the riskiest part to starting a general partnership — and also means it’s very important to know the people you plan to go into business with.
Is a general partnership right for your business?
If you are going into business with another individual you know and trust, a general partnership might be a good solution for your business. Professionals like general partnerships because of how simple they are to set up.
Assuming you already have a business partner who you trust, you can get started right away with a general partnership. The only thing required between partners is a verbal agreement (although a written partnership agreement is a good idea). In addition, filing forms with your state is not required and you won’t have to pay any corporate taxes due to the pass-through structure.
As great as a general partnership can be, it does, however, come with risks — mainly liability. In the event you make any mistakes, such as incur debt, you and your partner(s) are liable. Likewise, if your partner does anything negative without your permission, such as sign an agreement with a software company, you will still be obligated to fulfill the terms of the agreement.
Ultimately, the business structure you choose depends on your relationship with your potential business partners and how much liability you are willing to take on.
[Read: Getting Ready to Launch? How to Choose the Right Business Structure]
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