General Partnership: Advantages & Disadvantages
What is a General Partnership?
A general partnership is the most common and easiest form of partnerships because forming one does not technically require creating or obtaining any special business documents that state your business is a general partnership. Instead, a general partnership is simply created when two or more people agree to conduct business together to make a profit. The two other forms of partnerships are:
Although you do not need to obtain any business documents to become a general partnership, you will likely have to apply for a business license in your particular city and county that you plan to do business in. This is because the legal structure of your business can be a general partnership without any business documents, but for your partnership to then conduct any business, it will likely need to obtain a business license. Visit http://www.calgold.ca.gov/ to see what specific licenses and permits your partnership will need.
Naming the Partnership
If you do not specifically name your partnership, your general partnership will be automatically named according to the last names of its partners. If you rather not have your partnership be called by the last names of all its partners or you and your partners cannot agree on whose last name should go first, you can file for a fictitious business name (FBN). A FBN will allow you to name your partnership any name you can imagine with a few exceptions. The exceptions include:
the partnership name cannot be misleading to the public or closely resemble another business name
cannot falsely imply that your partnership is affiliated with the government
cannot include the words “bank,” “trust,” “trustee,” “credit union,” or related words.
Does A General Partnership Need A General Partnership Agreement?
Yes. Creating a general partnership without having to create and file any documents with a government agency sounds great. However, agreeing to conduct business with a partner orally without writing anything down can later cause problems when disagreements arise, such as how much profit each partner is entitled to or what responsibilities each partner has. To avoid disagreements that can destroy the partnership and also any friendly relationship the partners have with each other, I highly recommend creating a written partnership agreement. If you can afford to, hire an attorney to draft the partnership agreement to ensure that each partner is treated fairly and the agreement is tailored to the partnership’s business needs.
Without a written partnership agreement, default rules will apply to all partnerships, which are that all partners share equally in the profits, losses, and any liability the partnership has. This sounds fair at first, but this can cause tension among the partners, if for example, one partner is not doing his or her fair share of work, but yet gets an equal share of the profits because that partner is simply entitled to it. Having a written partnership agreement will clear any misunderstandings and formalize the partnership. Also, a written agreement will allow you to open a business checking account for the partnership as most banks will require it.
Advantages of A General Partnership
Easy to form – No business documents to create or file
Inexpensive – There are no costs to create or file any documents, except for the cost of creating a partnership agreement
Increased financial resources – Can pool funds with a partner(s), which can double or triple the amount of funds your business has to operate from
No double taxation (flow through taxation) – The partnership itself is not taxed and instead, each partner is taxed individually with the profits/losses being reported on each partner’s own income tax
This is different from a corporation where the corporation will have to pay a business tax for simply operating as a corporation and additionally, each shareholder will have to pay taxes on their own income tax forms
Disadvantages of A General Partnership
No limited liability – Like a sole proprietorship, you are personally liable for all of the debts and actions of the partnership
If there is not enough money or assets in the partnership to pay off any debts or court judgments against it, then your personal assets (such as your car, house, T.V., computer, and anything of value) can and will likely be used to pay off the debts of the partnership
Personally liable to everything your other partners do – Each partner is personally liable for all the actions every partner does, which includes any debts that a partner incurs.
This means that you can be personally liable for a business loan your partner took out without your knowledge, so a bank can come after you to pay off the loan if your partner is not able to. Although unfair, you will be liable for paying off the loan and if you are unable to do so, the bank can come after your personal assets too.
Costs of a General Partnership in California
Business License/Permits – check out http://www.calgold.ca.gov/ to know exactly what licenses and permits you need to obtain to conduct business in your particular city and county
Fictitious Business Name, if applicable
Obtaining an Employer Identification Number (EIN)
Intellectual property protection, such as registering your partnership’s name as a trademark or registering any copyrights or patents your partnership may have
*The above article is for general informational purposes only and should not be taken as legal advice. Please contact a business lawyer to find out how any information here applies to your particular circumstances.