General Partnership

General Partnership

A general partnership is made up of two or more partners where all partners manage and are responsible for the business' operations and debts.


Overview

Main Guide: Starting a Business.

A general partnership is made up of two or more partners where all partners manage and are responsible for the business' operations and debts. It is typically created by an agreement among the partners, rather than a formal filing with the state. Each partner typically contributes skills, money, and time and each partner also shares in the company's profits and losses.


Related Services


Taxes

Taxes:

General partnerships are “flow through” entities for income tax purposes. This means that the GP does not pay income taxes separately to the IRS, rather the partnership's revenue and losses are included by the partners on their personal income tax returns.


Pros & Cons

Pros:

  • Easy Formation. Creating a general partnership is simpler, cheaper, and requires less paperwork than forming a corporation. Typically there is no filing requirement with the state. However, the partnership should file a partnership agreement in the county where it does business. Partnership agreements should state the purpose of the business and responsibilities of the partners.
  • Simplified Taxes. Tax benefits are the biggest advantage of a general partnership. Businesses structured as partnerships do not pay income tax, instead, all profits and losses are passed through to the individual partners. The partnership is still required to file a tax return stating profits and losses, but it will not pay taxes on the income.

Cons:

  • Personal Liability. Partners are personally liable for lawsuits filed against the business. Even if a partner is acting on their own, all partners are responsible for the outcome of those decisions which affect the business.
  • Tax Ownership. Partners report their share of the company's profits and losses on their personal tax return. This can often bump partners into a higher tax bracket than they would otherwise be in.
  • Management Issues. Partners often make investments into the business from their personal finances, and the money invested is then owned by all partners. It can be easy for questions of reimbursement to arise. Having all partners equal in power and responsibility can cause problems unless proper guidelines are laid out from the beginning.

General Partnership Agreement - free legal document

Download Now