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Be aware of general partnerships.

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A partnership is a business structure formed by two or more persons who agree to carry on business together for profit. There are three types of partnerships:

  • General
  • Limited
  • Limited liability partnerships

Profits, losses and managerial responsibilities are shared equally among the partners in a general partnership. Each partner has a personal liability which means that any or all of the partner’s personal assets can be taken to settle a debt or a lawsuit.

There are two classes of partners in a limited partnership: the general partner who has unlimited liability and the limited partner who’s personal liabilities is limited to their investment in the business.

The limited partner remains silent on the side lines while the general partner manages the business.
Limited partnerships are commonly used for short term projects such as property investments or marketing projects.

A limited liability partnership is only available to certain professions licensed by the state, such as engineers, doctors, accountants and attorneys. The personal assets of every partner in a limited liability partnership can’t generally be used to satisfy business debts and liabilities. However the limited liability partnership does not protect the partners from their own carelessness or wrongdoing.

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The general partnership is the most common type of partnership. Like sole proprietorship a general partnership is relatively easy to setup and maintain. There is usually no paper work required to create the general partnership agreement.
General partnership has begun once you and at least one other person get together and sell a products or services for profit. Partnership status confers solely and automatically from the business activities of you and your partner. Every single partner contributes to all aspects of the business including labor, money and talent. In return each partner shares the losses and profits of the business. It is a very good idea to have things in writing, so you should take some time and draft a written partnership agreement.

Your partnership agreement should include the following:

  • How your business will be financed.
  • Who will do what work?
  • What happens if a partner dies or becomes disabled?
  • What happens if a partner wants to leave?

The IRS considers the general partnership a pass-through entity which means that like a sole proprietorship profits and losses flow through the partners individual income tax returns. All the partners will share profits and losses of the business as well as be liable for all of its debts, obligations and liabilities. Each partner has an equal responsibility and authority to run the business and to bind it if they wish. What this means is that any one of the partners can commit the partnership by entering into an agreement on behalf of the partnership and all of the remaining partners will be personally reliable regardless of whether they authorize the agreement or even if they even knew of its existence.

A general partnership is the most risky type of entity to form because each partner has unlimited liability. Not only can you be liable for any agreement your partner enters into, you can also be held liable for that partner’s wrongdoing or carelessness. In addition, each partner is personally liable for all of the partnerships obligations. For example if your one of ten partners you are not responsible for just 10% of the partnerships obligations, you are actually responsible for all of it, a hundred percent.  If the other partners are unable to pay their respective shares you’ll be responsible for paying the entire amount.

 

Summing up the concept of what general partnership is.

The advantages:

  1. General partnerships are relatively easy to established and are less strictly regulated like corporations and LLC’s.
  2. With more than one owner the ability to raise capital is enhanced, because you have more resources to draw upon and the capacity to borrow money is usually greater.
  3. A partnership benefits from the combined abilities of a group of persons who have complementary skills. One person may be good at marketing while another may be better at operations. There is a wider pool of knowledge, skills and contacts to draw upon.

The disadvantages:

  1. Partners have unlimited personal liability for all business debts, obligations and liabilities. If the business is sued and judgment is obtained every single partner could lose their personal assets to satisfy the judgment. And if the business goes bankrupt all the partners will have to clear the debt, even if it means selling their personal assets.
  2. Profits must be share with others and you have to come to an agreement on how to value each other’s time and skills which can be a big challenge.
  3. The partnership has usually a limited life. It can end upon the withdrawal or death of any partner.

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