16 Jun What’s a General Partnership
By: Barry E. Haimo, Esq.
June 16, 2016
What Is a General Partnership?
Many people would jump at the chance to have their own business, but first you need to have an idea. And if you’re lucky enough to stumble upon a good idea, then you might actually be able to create and establish your business around it.
In the early stages of business planning, however, there are a number of things you need to think about and consider. Why are you starting a business in the first place? Who is your customer? How much money will you need to get started? Will you need a loan? What is your model? What is your plan? Who is your competition?
And, most importantly, at least for the beginning stages, how will you organize your business? Your answer to that question will then help you answer all of the other questions that pop up as you navigate through the business planning process.
There are a variety of business structures depending on your business’ goals and needs, such as:
- Sole proprietorship
- Limited liability company (LLC)
- Professional Association
- Limited Partnership
- Limited Liability Partnership
- Limited Liability Limited Partnership
Today, we will be discussing partnerships and, more specifically, general partnerships.
Types of Partnerships
A partnership is generally defined by when two or more people do business together. They do not even have to “own” anything at all. More commonly, however, each partner contributes to all aspects of the business, and, unless otherwise agreed, each partner shares in both the profits and losses of the business.
There are three basic types of partnerships:
- General partnerships are when a business is divided equally between the partners and the partners share in management, liability, and profits and losses. If the partnership isn’t going to be equal, the percentage for each partner must be written down in the partnership agreement. Partnership agreements are always a good idea. Otherwise Florida statute’s default rules apply, and they may be quite contrary to your needs, goals and understanding of your agreement with your partners.
- Limited partnerships allow partners to have limited liability as well as limited input with decisions about management, and are more intricate than general partnerships. In this case, only the general partner is liable for the liabilities and debts of the business. This is why general partners are typically business entities themselves.
- Joint ventures are general partnerships but with a time limit or for a single project. They tend to involve two distinct companies working together on something specific.
What You Need to Know About General Partnerships
While general partnerships are affordable and simple to form, there are a few important details you should know before establishing one.
Liability. When you have a partnership, all partners are personally liable for business obligations, debts, and even court rulings. What this means is that if the business is unable to pay creditors, then those creditors can legally go after all of the partner’s personal assets. As a result, each individual partner is jointly liable with all partners so they can be sued for and obligated to pay the total amount of any business debt. If this occurs, a partner’s only option might be to sue the other partners for their share of the debt.
Joint authority. Like joint ownership on accounts, each individual partner can make decisions on behalf of the business and legally bind the business to a contract, commitment or deal; there are a few limitations, such as that one partner cannot unilaterally sell off all of the assets of the partnership.
Taxes. A partnership is referred to as a “pass-through entity,” which means that it’s not a separate tax entity from the partners. The partnership doesn’t have to pay income taxes on its profits. Instead, it files an information return called a Form 1065, and business income “passes through” the business to the partners. The partners then report their profit or loss shares on their own income tax returns, as reflected on their respective Form K-1..
Ending a partnership. If one partner wants to leave the business, the partnership usually dissolves. At that point, the partners must pay off all their debts, complete any remaining business obligations, and divide any profits and assets between themselves.
Creating a general partnership can be an easy but dangerous way to establish your business, but if you’d like to learn more about partnerships and business planning in general, contact an experienced business planning attorney today to get the right answers to your questions.
Barry E. Haimo, Esq.