26 Jul What Are the Advantages and Disadvantages of a General Partnership?
By: Barry E. Haimo, Esq.
July 26, 2016
What Are the Advantages and Disadvantages of a General Partnership?
Creating a business is difficult to do alone. Bringing on someone as a partner can seem like a great way to take some of the burden off of you while increasing the connections you have and therefore your chances of success.
But if you decide to partner with someone on a business, you have to understand what that means, starting with the fact that there are different kinds of partnerships. Below, we’re going to talk about a general partnership. We’ll go over both the advantages and disadvantages that come with setting one up, as well as the legal requirements you have to follow and how to get started.
Advantage: Easy to Create
The biggest selling point of a general partnership, as opposed to limited and limited partnerships or limited liability partnerships is that they are quite easy to create. In fact, under Florida law, any two people working together for profit is considered a partnership. Unless you formally incorporate into another type of business entity, you are characterized as a general partnership. Calling it a “joint venture” has the same result. For purposes of both state law and taxation, you are a general partnership. You need not file anything at all to get started.
Disadvantage: Easy to Dissolve
Like other business entities in Florida, absent a formal partnership agreement, general partnerships rely on state statutes to provide default rules for all aspects of governance. They can be found under Chapter 620, Florida Statutes.
If you don’t have a formal agreement, general partnerships are just as easy to dissolve as they are to create. There is obviously a protocol for winding up and closing business, but the process is easier in the sense that there are on required filings.
Advantage: Flow of Personal Income
Like limited partnerships and LLCs taxed as partnerships, a general partnership allows for all partners involved in a business to directly pass through profits and losses to into their personal income taxes. As a result, the income generated from the partnership is taxed at their personal income tax rates rather than as a separate business entity. This is great for small businesses, where immediate cashflow and profits can be a huge struggle. However…
Disadvantage: Little Protection
As a general partnership, all partners are liable for business debts and any legal issues that arise. There is no formal legal protection in place because you don’t incorporate the business into a separate legal entity. Consequently, this exposure to liability renders general partnerships as bad vehicles for business in most cases. It may make sense where both partners are incorporated entities. That being said, in those cases the partners may prefer to form a new entity anyway. This vulnerability to liability is probably one of the largest downsides to a general partnership, so make sure that you are careful with products, contracts, disclaimers, and so on.
Like limited partnerships and LLCs taxed as a partnership, general partnerships allow you to negotiate the terms relating to allocation of profits and losses, management operations and transfers of interests. This means that you can decide who works on which aspects of the business, and can decide on mutually beneficial structures, salaries, payments, and more. The problem is…
Disadvantages: Lack of Structure
When only general outlines are given, partnerships can be contentious at times. Sometimes, finances play a role, while sometimes it’s the general structure and responsibilities that cause trouble. This also means that you are liable for your partner’s decisions, which can affect profits and perception within the business. The bottom line here is to always have a formal partnership agreement outlining each partner’s roles and responsibilities, as well as how the partnership will be managed, operated and the profits,losses and distributions allocated.
When you’re first starting a business and have no idea where you’re going with it, a general partnership can be a huge asset. It’s always important to get good advice and sit down with an estate and business attorney to help you get started the right way.
Barry E. Haimo, Esq.