General Partnership Definition, Structure, and Liability Explained
If you’re starting a business partnership, you might be considering a general partnership agreement. It’s the simplest arrangement, and it might be the best one for your situation. Before you jump into anything, read on to make sure that a general partnership is what you really want.
Table of Contents
What is a General Partnership?
A general partnership is an agreement between two or more partners to equally split ownership of a business. This means that they all share profits, losses, and liability.It also is the easiest partnership to form, requiring nothing more than two people’s agreement to form.
General Partnership Structure
A general partnership has less structure than other types of partnerships. Because you technically don’t even need a general partnership agreement, you and your partner have a lot of freedom when it comes to running the business. Since all the partners are general partners, you all have equal control over the business, so you can split roles at will.
General Partnership Liability
All the partners in a general partnership share liability. This means that if one of your partners is found liable for negligence or wrongdoing, you are legally on the line as well. Furthermore, your personal assets are considered business assets, so your house or car could be used to pay off a lingering business debt. In a general partnership, there are no liability protections.
General Partnership Advantages and Disadvantages
- You don’t need to get a license with the state; all you need is a partner that agrees to start a business with you. This is simpler and less expensive, since you usually have to pay a licensing fee annually.
- You have a partner that is just as liable as you are, so you know that they will do their best to take care of the business.
- There is no liability protection for the partners, so you can be held liable for a decision that you didn’t even personally make.
- All partners in a general partnership have the same amount of power, so unless you have a clear system on how to resolve disputes, it could turn sour quickly.
General Partnership Agreement
This is the best way to make sure that your business doesn’t fall apart because of a dispute between you and your partners. A general partnership agreement, while legally not required, will give you a clear path on how to resolve disputes, what to do if one partner leaves, how to distribute responsibilities, etc. It’s in everyone’s best interest to sit down and create a general partnership agreement beforehand, otherwise you might be subject to your state’s laws in the event of a dispute.
Here are some templates for a general partnership agreement:
- Template from the Small Business Administration
- Template from LawDepot
- Template from Duquesne University
General vs Limited Partnership (LP)
A general partnership differs from a limited partnership in the following ways:
- There are no limited partners in a general partnership, but there are general partners in a limited partnership. General partners can control day-to-day activities of the business, whereas limited partners are basically just investors.
- A general partnership has no liability protection for its partners; a limited partnership has protections for its limited partners. They can only be held liable up to the amount that they contributed to the business.
- A general partnership does not require licensing, but a limited partnership does.
- A general partnership forms automatically when two people start a business together, but a limited partnership requires state approval.
General vs Limited Liability Partnership (LLP)
In a limited liability partnership, partners have liability protection, as opposed to a general partnership, where they don’t. Furthermore, you cannot to held accountable for other partners’ wrongdoings in relation to the business, only your own. There does not have to be a general partner in an LLP; all partners could theoretically help run the business and have limited liability.
A LLP also requires licensing and state approval, which are costs you don’t have to worry about with a general partnership.
If you’re considering starting a business partnership, a general partnership is certainly the simplest. However, only start one with someone you trust, and make sure to create a general partnership agreement beforehand to smooth out the ride.
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Dayton is a chronic Wikipedia addict, which is detrimental to her social life but stellar for her writing. She resides in Boise, ID, surrounded by her own frantic outlines, highlighted encyclopedias, and potatoes. The latter was not by choice.
This post was updated February 28, 2019. It was originally published October 26, 2018.