Attorneys at Law

Be Informed.

Be informed.

What Are General Partnerships?

If you are considering venturing into the world of small business ownership you will have a seemingly endless list of decisions you must make regarding the business before it even gets off the ground. There are three broad categories of business entities from which you may choose – sole proprietorship, partnership, and corporation. Within the partnership and corporation categories there are also a number of sub-categories and hybrids. Taking the time to learn what general partnerships are will help you decide if a general partnership is right for your business.

The simplest business entity to understand is a sole proprietorship. If you are operating a business, are the only owner, and have not declared your business to be anything else, it is a sole proprietorship. At its most basic, partnership is created when two or more parties get together and decide to operate a business together and share in the profits. Partnerships are a step up in complexity and can get rather complicated depending on what type of partnership you create.

Like a sole proprietorship a partnership is legally intertwined with the partners instead of being a separate legal entity as is a cooperation. A partnership does not require anything formal to be executed in order for a partnership to be formed. In fact, you don’t even need to have the intention to form a partnership for one to be formed. Simply being in business with someone else can be sufficient to form a legal partnership. A Partnership Agreement can, however, be executed if the parties wish a more formal arrangement.

In a general partnership taxes “pass through” to the partners, meaning the partnership itself is not a tax paying entity. Instead, the profits of the business are “passed through” to the individual partners and are claimed on the partners’ personal income tax returns each year. The partners in a general partnership decide amongst themselves how the profits of the partnership will be divided among the partners. Debts and liabilities of the business, however, are the responsibility of all partners because in a general partnership “joint and several liability” applies.

Although the law does not require a formal, written agreement to form a general partnership it is always a good idea to create a written Partnership Agreement anyway to prevent disagreements that could lead to protracted and costly litigation down the road.