A general partnership is a business entity owned by two or more people, which has not filed documents with the state to become another type of business entity (i.e., a corporation, LLC, etc.). Simple to create and administer, general partnerships are a commonly-used entity for owners to carry on their business operations.
Learn More About General Partnerships
- Fast and simple to create
- Easy to administer and operate
- No need to file partnership formation documents with the state (in CA, filing a Statement of Partnership Authority is optional)
- Lack of limited liability means that partners are personally responsible for partnership debts
- May be impractical for large number of partners
General Partnership Basics.
An LLC is usually organized with the secretary of state (or its equivalent) in the state where it will operate. The owners, called members, have limited liability—that is, they are generally protected against personal responsibility for the debts and obligations of the LLC, much like shareholders of a corporation are shielded from liability for corporate debts. So if the LLC incurs a liability it cannot pay, its members generally will not be responsible for paying that debt.
When two or more parties agree to work together and engage in a business for profit, a general partnership is formed. Each partner has a say in the management of the business, and shares in the partnership’s profits and losses. The rights and responsibilities of each partner should be described in a written partnership agreement. In the absence of a partnership agreement, the partnership law of the state where the partnership was formed will govern.
Unlike with a corporation or LLC, partners in a general partnership do not have the benefit of limited liability. This means that each partner may be held personally responsible for the partnership’s debts.
General partnerships have a very simple structure: the partnership is comprised of the partners, each of whom owns a portion of the business, shares in its profits and losses, and takes part in managing the business operations. The partners have great flexibility in deciding how to structure the management and operations of the partnership. For example, one partner may be tasked with marketing the business, while another handles the finances. The partners have similar flexibility in determining how partnership income and liabilities should be distributed among them. Again, it is generally prudent for the partners to memorialize the terms of their partnership in a signed partnership agreement.
Because a general partnership is not considered an independent legal entity separate from its partners, it is generally not taxed at the partnership level. Its profits and losses are passed through to the individual partners, who then report their share of the partnership income on their personal income tax returns.