When you start a business, one of the crucial decisions is which structure to adopt to ease the achievement of goals and needs. A general partnership is one of the business models that remain most popular and simple to implement due to its collaborative nature.
This type of business is common among most small and emerging businesses as it allows for easy setup and minimal costs.
In this article, we will look into what exactly a general partnership constitutes, its striking features, the pros and cons of the business model, and the necessary steps to establish a partnership, and assist you in making a conclusive decision on whether it is ideal for your enterprise.
What is a General Partnership?
As the name general partnership suggests, such an arrangement is one of the most rudimentary business structures. It involves two or more people who agree to jointly undertake, control, or run a business by sharing the operational duties, earnings, and debts of the business.
Unlike corporations or limited liability companies (LLCs), general partnerships do not require formal registration with state authorities to be established, even though it is prudent to execute a written partnership agreement.
These adaptable characteristics such as flexibility and the ease with which the model can be applied coupled with the cross-forming of other business types make general partnerships most preferred by small businesses at the infant stage of growth.
Advantages of a General Partnership
✅ Ease of filing: It is very easy to form a general partnership as there is no requirement to pay filing fees or fill out lots of paperwork including details about the corporation and LLC. This ease of formation is even more attractive to entrepreneurs who intend to launch their businesses as soon as possible.
✅ Cost-Effective: Due to the low formation cost incurred, general partnerships are a low-cost option for small businesses or start-up businesses. Businessmen can avoid legal and administration costs which would be payable had they opted for alternative ways of doing business.
✅ Combined Expertise: Partners can pool their resources and skills together to grow the business. This often leads to making better and more informed decisions.
✅ Flexibility: There is no fixed framework so the partners can govern the business how they deem necessary. This also allows them to efficiently respond and deal with any changes in the market or requirements of the business.
✅ Tax Benefits: With pass-through taxation, the problem of double taxation encountered by corporations is eliminated. This is a more tax-efficient structure since each partner is taxed only on the portion of the profits he receives.
Disadvantages of a General Partnership
✅ Unlimited Liability: Shareholders are exposed to the assets of the business due to its ability to borrow so much. When forming a partnership, these risks emphasize the significance of trust within people and clear strategy development.
✅ Shared Decision-Making: Conflict will arise in the business due to disagreements between partners, which may also be detrimental to the firm. A properly written partnership contract and effective communication may alleviate this problem.
✅ Limited Lifespan: As a rule, a partnership comes to an end when a partner withdraws, retires, or dies in the absence of certain provisions in the partnership agreement. This does not promote continuity and therefore leads to business risk and uncertainty.
✅ Difficulty Raising Capital: Partnerships are unattractive for investors as ownership of the firm is not comprised of a multitude of shares, as is the case for corporations or LLCs. Such a restriction could limit future growth and expansion.
✅ Joint Liability: Anyone of the partners can speak for the partnership pledge its assets and incur debts which makes every partner liable for the debts incurred by all the members of the partnership. Such joint liability admits a high degree of confidence and responsibility.
How to Form a General Partnership
Forming a general partnership is not difficult, however, consider following these steps as they may help allow you to have an easy setup.
Choose Your Partners
Everything starts with the selection of the right partners and this is the case when it comes to general partnership. Thus, it is imperative to have individuals who share similar values, goals as well as a work ethic.
Moreover, selecting partners that possess differing skill sets as well as different specialties increases the collective strength and overall efficiency of the company. Trust and honest conversations are also key variables as every partner shoulders large amounts of responsibilities and risk.
Draft a Partnership Agreement
Most states do not require a written partnership agreement although it is strongly recommended that one be prepared.
This is because a partnership agreement will serve as a guideline for the business and will have such features as the different responsibilities and duties of the partners, how profit will be shared, how decisions will be made, how conflicts will be solved, and how one can be added or removed from the partnership in general.
Therefore such an agreement minimizes chances of misinterpretation or miscommunication and problems while making it easier to manage the business.
Register Your Business Name
If your partnership wishes to use a name that is trademarked or differs from the names of the partners, there are appropriate local or state authorities with which to file a DBA registration.
This is a measure undertaken to ensure that the name of the business has been registered and accepted by local rules and regulations. Conducting a name availability search regularly prevents future legal battles.
Obtain Necessary Licenses and Permits
As with many businesses, there might be local permits or licenses that need to be obtained to show that compliance regulations within that area are met.
Examples can be a permit obtained from local authorities or a federal certificate. Doing this research early in the business and adhering to it is critical to preventing future problems or delays.
Set Up a Business Bank Account
For clarity and proper management of finances, personal and business finances should be kept separate. Opening up a business account enables better reporting of income and expenses and simplifies tax preparation while also looking professional for clients or partners. When opening the account, make sure that there are all partners listed as signatories on the account so that operations run smoothly.
Understand Tax Obligations
General partners do not pay taxes on business profits, but instead get what is called pass-through taxation. The business does not pay tax, it’s instead the owners who file returns for the profits and losses incurred.
To help make this easier, contact the IRS to obtain a business Employer Identification Number (EIN) Additionally, ensure that you fulfill your state and local taxes.
Any sales tax, payroll tax, or any other requirement should be included. A tax lawyer might be of great assistance while you are filing your taxes.
Examples of General Partnerships
✅ Law Firms: The general partnership structure is common in small law firms and law practices, where the members are the lawyers who are in charge of the cases that come through the firm, including revenue and losses. This model encourages securing and managing cases by utilizing other resources.
✅ Family Businesses: The family members create general partnerships as owners of family businesses such as restaurants and clothing stores. Where trust and common objectives are used to reach a business goal.
✅ Consulting Agencies: Generally, more than two consultants are likely to come together and as a result form a general partnership to work collaboratively to better serve consumers. With this, they can provide greater benefits to clients.
Is a General Partnership Right for You?
A general partnership rings true for small businesses with two or more business owners who are willing to develop a level of trust in each other, as well as in the sharing of responsibilities joined with liabilities.
However, with the feature of unlimited liability, it is less ideal for high-risk categories of businesses. It is imperative to assess how your business is structured, how much the partners trust each other, and their willingness to share financial and operational risk.
If you are thinking about becoming a general partner in a business then it’s worth looking at those features or aspects of the partnership agreement which are inviting or nasty. Making use of a law or financial consultant can help with that.
Moreover, there is much a partnership agreement can do, it can assist in demystifying the partnership structure as well as limit the risk involved.
Conclusion
A general partnership provides the easiest option in forming a business entity with two or more members willing to be involved in the ownership or management of the business. Although, it has enormous benefits such as it’s cheap and easy to establish, the unlimited liability is a great threat.
Drafting a good partnership agreement and knowing your legal and financial responsibilities, can enable you to build a strong general partnership. Good planning, transparency, and trust among partners are the fundamental principles of an effective general partnership.
Starting a general partnership? EasyFiling can make it happen. From writing up partnership contracts to getting the necessary permits, EasyFiling gives you everything you need to get started with ease.
Book a free consultation today with Easyfiling to form your general partnership.
Nabin Adhikari
