General Partnership: Pros and Cons
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General partnerships are a great way to pool your resources with someone who shares similar professional competencies. In the article below, we’ve outlined everything you need to know about general partnerships:
What is a General Partnership?
General partnerships, also known as GPs, are a type of legal entity that two or more owners create on a jointly-owned business. They establish the terms and conditions through a legal agreement. This business partnership agreement addresses ownership issues, such as profits, losses, and liabilities.
This web page also discusses general partnerships.
Pros and Cons of General Partnerships
It is critical to select the right partner to assist you in your business. Before making a final decision, understand the benefits and drawbacks of general partnerships.
Pros of General Partnerships
Here are the five pros of general partnerships:
Pro 1. Ease of Formation
A general partnership is as simple to establish as a sole proprietorship . The formation of a partnership business requires only a few filings, such as a detailed partnership agreement that outlines the responsibilities of each partner in the business.
Pro 2. Default Entity
There is no need to draft a detailed legal document before starting operations. This assertion is true as long as each partner agrees on the guidelines for their business among themselves.
Pro 3. Leadership Diversity
In a general partnership, people from various backgrounds and cultures pool their resources to form a general partnership. Diverse people’s experiences and skills can help you build a more effective and profitable business that will last in the long run.
Pro 4. Passthrough Entity Taxation
Partner report profits and losses incurred by the business on individual tax returns. This pass through entity gives them the benefit of the pass-through taxation structure.
Pro 5. Ease of Conversion
Each partner is responsible for half of the company’s liabilities. If five partners are involved, the liability percentage drops to twenty percent for each, but this does not guarantee risk-free business because personal assets are at risk.
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Cons of General Partnerships
Here are the five cons of general partnerships:
Con 1. Personal Liability
Because a general partnership does not function as an independent entity, it lacks the financial protection of personal assets that a corporation or other types of business structures provide. If there is a problem with liabilities or losses, each partner may be personally liable depending on the cost, putting their assets at risk.
Con 2. Startup Funding
Each partner in a general partnership has personal tax liabilities and general debt liabilities that they cannot control directly. It makes it difficult for the company to find investors or other sources of financing to raise capital outside of the partners’ networks. As a result, a general partnership tends to be smaller compared to an LLC or corporation.
Con 3. Self-Employment Taxes
Instead of paying corporate taxes, general partners pay self-employment taxes. Self-employment tax is currently 15.3 percent.
Con 4. Transferability
A partner cannot transfer or divest their interest in their own business unless stated explicitly in the general partnership business agreement. Some states use the unanimous voting method because there are no strict regulations for a transfer of interest.
Con 5. Licenses
Many states allow partnerships to run without a license. However, a general partnership must have a business license when necessary. Examples of businesses that require licenses are restaurants and bars.
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Who Owns a General Partnership?
General partners own a general partnership. They form one by filing documents with the secretary of state’s office when requested. Otherwise, a general partnership agreement is sufficient to establish a relationship.
Here’s a web page that describes general partners.
General Partnership vs. Limited Partnership
General partnerships and limited partnerships have differences and similarities. They have in common that they both function as pass-through entities for tax purposes. As such, general and limited partners don’t have to pay taxes and report them on personal tax returns instead
Here are a few other issues to consider when looking at general partnerships vs. limited partnerships:
Liability
In the event of insolvency, general partners face unlimited liability. In other words, if the company goes bankrupt, bankruptcy courts can use the general partners’ assets to pay off debts. There’s virtually no asset protection on a general partnership.
Limited partners, on the other hand, have a lower level of liability than general partners. This outcome is since they don’t have the same authority and power as general partners.
Ownership
The partnership agreement predetermines the limited partners’ ownership. If the general partner’s ownership is not mentioned or stated otherwise in the agreement, the general partner’s ownership is an equal owner of the entity.
Control
Limited partners do not have complete control over operations or process management. Simply put, limited partners have very little power compared to general partners. General partners have complete control over the company’s operations, management, and other decision-making authority.
Profit & Loss
If profits and losses are not stated or mentioned in the agreement, general partners share them equally. Limited partners, on the other hand, share profits and losses based on their investment amounts.
General Partnership vs. LLCs
General partnerships are vastly different from LLCs. The most significant difference lies within asset protection and personal liability, not to mention taxation. An LLC can also act as a general partner in a general partnership.
Here are a few other essential considerations to make as well:
Formation
A limited liability company (LLC) is formed by filing “ Articles of Organization ” with the secretary of state’s office. The LLC specifies its name, whether the owners will run the company, the location of its principal office, and who will receive notices, lawsuits, and other official documents on behalf of the LLC.
General partnerships are formed by at least two people agreeing to be partners or conducting business and sharing profits even if there is no formal agreement. The partners do not file agreements and organizational documents. Unless it does business under the partners’ real names, the partnership must register a trade name.
Owners’ Liability
General partners are personally liable for the debts of the company. These obligations include money owed for loans and agreements, as well as injuries caused by a partner’s or its employees’ wrongful acts. Creditors can seize the partners’ homes, bank accounts, and other assets to pay their debts.
A member’s liability in an LLC is limited to his investment in the company; they do not risk losing personal assets to pay company debts.
Partners’ Authority
A single partner can act on behalf of the general partnership, putting the other partners at risk for unpaid debts, negligence, and intentional wrongdoing. A member-managed LLC, like a partnership, is run by its members.
Termination
There is no such thing as a general partnership that exists independently of its owners. The partnership ends when one of the partners dies, withdraws, or is unable to conduct business. An LLC survives the death or removal of a member because it is a separate legal entity and has operated indefinitely.
If you need a business formation or help with joint ventures, corporate lawyers and LLC lawyers can help you navigate the issues. They’ll ensure that you create the perfect structure that’s legally sound and healthy. Post a project in ContractsCounsel’s marketplace to find a legal professional in your state today.
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Steven S.
Steven Stark has more than 35 years of experience in business and commercial law representing start-ups as well as large and small companies spanning a wide variety of industries. Steven has provided winning strategies, valuable advice, and highly effective counsel on legal issues in the areas of Business Entity Formation and Organization, Drafting Key Business Contracts, Trademark and Copyright Registration, Independent Contractor Relationships, and Website Compliance, including Terms and Privacy Policies. Steven has also served as General Counsel for companies providing software development, financial services, digital marketing, and eCommerce platforms. Steven’s tactical business and client focused approach to drafting contracts, polices and corporate documents results in favorable outcomes at a fraction of the typical legal cost to his clients. Steven received his Juris Doctor degree at New York Law School and his Bachelor of Business Administration degree at Hofstra University.
"⭐⭐⭐⭐⭐ Highly Recommend Steven Stark! We hired Steven Stark to help us create our Liability Waiver and Membership Terms & Conditions for our Brazilian Jiu-Jitsu academy, and we couldn't be happier with the experience. Steven took the time to truly listen to our needs and understand our business. He was patient, thorough, and made sure we fully understood every part of the documents before moving forward. His communication was excellent throughout the entire process, and he was always available to answer our questions. One thing that really stood out was the complimentary consultation he offered. It gave us the opportunity to discuss our concerns and goals without feeling pressured, and it was incredibly helpful. Steven's professionalism, attention to detail, and dedication to his clients gave us confidence that our academy is properly protected. We greatly appreciate the time and effort he invested in helping us. We would definitely hire Steven Stark again and highly recommend him to any business owner looking for legal assistance with waivers, contracts, or membership agreements. Thank you, Steven, for your outstanding service!"
Elizabeth J.
Libby Jamison founded E. Grace Law Firm after nearly two decades practicing law across federal agencies, private firms, and nonprofit organizations. She has advised at the highest levels of government and built a career defined by tackling complex, high-stakes legal and policy challenges. Her practice focuses on business, employment, veteran, and family law matters, drawing on her wide scope of experience including nearly seven years as counsel at the Department of Veterans Affairs. Her legal experience spans federal agency counsel, firm ownership, and nonprofit work. She is licensed to practice in California and Washington and was admitted to the U.S. Supreme Court. Beyond legal practice, she has led as a nonprofit president, chaired a U.S. Chamber of Commerce economic empowerment zone, and served on an American Bar Association Standing Committee on Legal Assistance for Military Personnel. Her work has been recognized by: Mighty 25 Awardee (2023) Changemaker of the Year, Military.com (2019) Bush Institute Stand-To Veteran Leadership Scholar (2019)
"Libby is amazing to work with! She was very thorough and got everything done ahead of schedule. I look forward to working with her again in the future"
Jeremiah C.
Jeremiah C.
Creative, results driven business & technology executive with 27 years of experience (17+ as a business/corporate lawyer). A problem solver with a passion for business, technology, and law. I bring a thorough understanding of the intersection of the law and business needs to any endeavor, having founded multiple startups myself with successful exits. I provide professional business and legal consulting. Throughout my career I've represented a number large corporations (including some of the top Fortune 500 companies) but the vast majority of my clients these days are startups and small businesses. Having represented hundreds of successful crowdfunded startups, I'm one of the most well known attorneys for startups seeking CF funds. I hold a Juris Doctor degree with a focus on Business/Corporate Law, a Master of Business Administration degree in Entrepreneurship, A Master of Education degree and dual Bachelor of Science degrees. I look forward to working with any parties that have a need for my skill sets.
"Jeremiah was pleasant to speak to and provided high quality work. I appreciate that he took the time to call me personally instead of a paralegal. Work delivered early and high quality! Highly recommend"
Kenneth G.
Kenneth E. Gray, Jr. is a business and tax attorney who advises entrepreneurs, investors, and closely held companies on transactions, tax planning, disputes, and long-term wealth structuring. He focuses on helping clients make legally sound decisions that also make business sense. Ken’s practice includes business formation and restructuring, mergers and acquisitions, private investments and fundraising transactions, contract drafting and negotiation, and cross-border matters. He also maintains a significant tax practice, advising on federal and state structuring, specialty filings (including partnership, corporate, and non-resident matters), and representing clients in disputes before the U.S. Tax Court and other federal and state tribunals. In addition to his transactional work, Ken handles commercial and business litigation, including tax controversies, financial disputes, and partnership matters. His litigation experience informs how he structures deals and governance documents, with an eye toward preventing disputes before they arise. Ken also advises individuals and families on estate planning, trust formation, tax-efficient wealth transfer strategies, and probate administration, including planning involving closely held businesses and foreign assets. Before practicing law, Ken worked in banking and private equity, including managing a $5 billion emerging markets fund-of-funds portfolio at the U.S. Overseas Private Investment Corporation (OPIC) and serving in equity research at ABN AMRO. That financial background allows him to understand transactions from both the legal and capital perspective. He holds a J.D. from Georgetown University Law Center and an MBA from Yale University. He practices before the U.S. Tax Court, various state courts, and other federal courts.
"It is not easy to find a lawyer that knows Offshore Asset Protection Trusts, which own a foreign LLC, which owns a USA LLC. Fines could reach $100K if the tax forms are incorrect, or not filed. He was able to review my draft returns and provide memos with required changes (many, many changes), after 1 follow-up everything was basically done other than a few tiny edits. I really appreciated how he worked me in, right in the busiest time of tax season, to ensure there were no errors. Would definitely hire again."
Antoine D.
In his firm, Talented Tenth Law, Antoine focuses on helping people maximize their protection and prosperity in the courtroom and the boardroom. His firm’s services include representing people in lawsuits involving breach of contract, many types of civil lawsuits and helping business owners win government contracts among other things.
Bobby H.
Bobby E. Hill, Jr. is a native of Tuscaloosa, Alabama and holds undergraduate degrees in music and business administration from Xavier University of Louisiana. He received his Juris Doctor from the University of Miami School of Law where he was a staff and articles editor for the school’s Race & Social Justice Law Review and a student attorney in the institution’s Immigration Clinic. In addition to freelancing, Bobby is currently a litigation associate at Johnson & Freeman, LLC, a boutique litigation firm in Atlanta, Georgia, where he practices in the firm's Condemnation, Probate, Real Estate Litigation, Real Estate Transactions, E-Discovery and Business and General Civil Litigation Practice areas. In this role, Bobby has acquired appreciable experience in drafting memoranda of law for partners and senior counsel, and all litigation related pleadings including pleadings related to dispositive motions, discovery, appeals, and other post-judgment relief.
"Helpful. Professional. Gave us peace of mind on a business partnership agreement."
July 17, 2023
Christine T.
Christine E. Taylor focuses her practice in the areas of Hospitality Law, Business Law, Labor and Employment Law, Real Estate Law, Administrative Law, Estate Law and Litigation. Ms. Taylor grew up within the campground industry, working at parks in both the Yogi Bear’s Jellystone Park Franchise and the Kampgrounds of America Franchise. Armed with two decades of experience, Ms. Taylor is quick to point out the legal issues that apply to outdoor hospitality business owners. She has provided a wide variety of services to campgrounds, RV Parks, and glamping venues, including seasonal licenses, waivers, employment contracts, real estate services and even litigation services as needed.
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General Partnership
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Can partners hire employees in a general partnership?
I am a small business owner considering setting up a general partnership with another business owner. We are both looking to maximize our resources and capabilities by hiring employees, but I am unsure of the legal implications. Can partners in a general partnership hire employees, and what are the legal requirements for doing so?
Michael S.
Partners in a general partnership have apparent authority to take any action on behalf of the partnership, including hiring employees. This is true even if the partners have agreed between themselves that one a partner does not have the authority to hire employees. A partnership that limits the authority of one partner would give rise to a claim by one partner against the other, but third parties can rely on the apparent authority of a partner to make hiring decisions.
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