General Partnership FAQS

General partnership

A general partnership is an unincorporated business relationship among two or more persons that share equal liability and debts accrued by the company. It is a non-taxable entity but all partners must report their share of the income to the IRS and account for said income on their personal tax forms.

What are the disadvantages of a general partnership?

Liability for all parts of the company, including debts is shared by the partners. Therefore, in the event of bankruptcy, all partners, even non founding partners are liable to have assets seized to pay debts. Liability is a factor in a general partnership as all partners share liability for both their and the actions of the other partners. Additionally, partners can also be held liable for the actions of employees. Personal liability is unlimited in a general partnership, but damages committed while doing personal actions and not business related actions places sole liability on the partner. Actions committed by the partner while performing a function for the partnership would hold all partners liable, regardless of their contribution or input on the event.

How is a general partnership taxed?

A general partnership is considered a flow-through entity when the income is not taxed as the income goes directly to the partners who are in turn, taxed on their income. Taxing a partnership that serves as a flow through entity would constitute double taxation and therefore would be a non-taxable entity. Information about partnerships is reported but not taxed through the IRS K-1 form that accounts for each share of the partnership accrued by the partners. A general partnership does not need to be an equal partnership and profits can differ by partner. For this reason, each partner accounts for and pays taxes on their particular share of the profits, rather than having the general partnership entities taxed.

How are the rights in a general partnership determined?

The rights in a general partnership are determined by prior agreements made by the partners. There are no laws defining partnership functions such as voting and decision making rights. It is generally assumed that all have equal voting rights as partners, unless there is an agreement to the contrary that staggers voting rights on contributions to the partnership, or other related factors. Members of a partnership are expected to work in the interest of the partnership and inform other members of the partnership when pursuing an arrangement for one’s personal gain. Otherwise, members of a partnership are obligated to work for the benefit of the other partners, unless allowed otherwise by prior agreement.

Is a lawyer necessary for a general partnership?

A lawyer can serve a valuable function in a general partnership by helping to create comprehensive agreements that determine the contributions and rights of each partner and provisions for the addition of new partners. There should also be provisions in case the partnership is dissolved or a partner decides to leave the partnership. These provisions will determine the distribution of assets, shares and other property owned by the partnership.