Business Entities Explained: General Partnerships
A general partnership is an unincorporated business that consists of two or more people who share ownership and are responsible for all of the work. This type of business is typically created by written agreement between the parties but also may be implied by the conduct and acts of the parties. All partners have unlimited personal liability for the debts and liabilities of the firm.
Advantages
Minimal Formalities
Since forming a general partnership does not require submitting any paperwork to the state, this type of business is quite similar to a sole proprietorship. Therefore, the only formalities required by law for decision-making and taking action are verbal agreements between the partners.
The Combination of Resources
This kind of business allows for the combining of unique resources and abilities, and the authority to act is not restricted to just one partner.
A general partnership facilitates discussions about the allocation of earnings and losses and the transfer of interests. It is incredibly adaptable, and partners can change the company's management structure as necessary.
The Flow of Personal Income
The benefits of pass-through taxes for general partnerships are substantial. Partners, individually, are subject to taxation on business profits.
As a result, all individuals involved in the business can directly apply profits and losses to their personal income tax under this form of business. Partners' income tax returns can include business losses, which can be used to reduce the amount of taxable income from any source.
Disadvantages
Easy Dissolution
Although it is advised, a partnership agreement is neither required nor necessary in this kind of firm. Conflicts between partners might very easily lead to the company's demise. As a result, if one of the partners decides to leave, becomes incapacitated, or passes away, the partnership is dissolved.
2. Unlimited Personal Liability
Partners in a general partnership are liable for all obligations and liabilities of the partnership, even those incurred by another partner. This creates substantial risk for each partner.
3. Additional Fees
Since this sort of business involves multiple parties, the lawyer's hours may be greatly increased because each party must make every effort to adapt to protect themselves.
Who Should Use The General Partnership Business Structure?
General partnerships should be avoided because of the risks noted above. If there is a unique set of circumstances that warrant the use of this business entity, the partners should adopt a comprehensive partnership agreement to mitigate the inherent risks.
‘’All business relationships are built on trust, but partnerships are the most reliant on it. Use this business entity only after careful consideration and preparation of a written partnership agreement”. - John
