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Choose Your Business Formation: What is a General Partnership (GP)?

The Startups Team

Choose Your Business Formation: What is a General Partnership (GP)?

##What is a general partnership?
A general partnership is a business agreement where two or more people (partners) agree to share all of the profits, liabilities, and assets of a business.

General partnerships don’t have any liability protection, so both partners are legally and financially liable for the actions of the other. That means, for example, that if one partner is sued by an upset client, then the other partner’s personal assets — like their home, car, savings, etc. — can be forfeited as payment.

In order to become a general partnership, you need at least two people who agree to take on each other’s liabilities. While oral agreements do count, it’s always a good idea to get everything written down and signed in an articles of partnership agreement. And when it comes to taxes, every partner pays their own taxes on their own personal income tax forms.

Untitled (10)-min.jpg

##How do general partnerships work?
Even though all partners share profits and liabilities, in a general partnership each partner is allowed to go into an agreement or business deal all on their own — and the other partners are legally obligated to follow the terms of the agreement or deal. There’s obviously a lot of room for conflict here, so many people in general partnerships choose to outline how they’ll handle conflict resolution in their articles of partnership, which we go into below.

Another option for dealing with potential conflicts is agreeing that there has to be a unanimous vote if the business is going to move on with any major decisions. Finally, some general partnerships choose to appoint managers to their partnerships, kind of like a board of directors. That move allows them to turn to a (hopefully) objective third party when tricky stuff comes up.

As a rule, general partnerships dissolve when one partner dies or chooses to leave the partnership. Partners can choose to account for these eventualities in their articles of partnership.

##Advantages and disadvantages of general partnerships
When you’re trying to decide what type of business entity you’re going to form, it's a good idea to take a look at the advantages and disadvantages.

###Advantages of a general partnership
1. Easy to form
Compared to other business entities, it’s pretty easy to form a general partnership. That can be a big boost for smaller companies or companies that are just getting started. In most states, general partnerships don’t have to file any paperwork — but local governments might have more requirements.

2. Inexpensive to set up
In addition to requiring less paperwork than other types of business entities, general partnerships are also less expensive to set up.

3. Decisions can be made quickly
While corporations have many levels of management that have to be consulted to weigh in on big decisions, a partnership is able to be more agile and make quicker decisions.

4. The business isn’t taxed
Unlike some other forms of business entities, general partnerships aren’t subject to double taxation. Because every partner pays taxes on their personal portion of the income from the business, general partnerships don’t pay tax.

###Disadvantages of a general partnership
1. Liability
In a general partnership, all partners are personally liable for the actions of the other partners. They’re also liable for any debts and obligations incurred by the business. So if one partner gets sued, all of the assets of all of the partners are potentially subject to forfeit. And if the business can’t pay off its debts? The personal savings and assets of each partner are similarly at risk.

##How do you set up a general partnership?
The first thing you need to do to set up a general partnership is find someone you want to go into business with. Once you have that established, it’s time to create your articles of partnership. While an articles of partnership isn’t required, it’s always a good idea when you’re going into a legal partnership with someone else to have everything spelled out and signed on paper.

###Articles of partnership
Your articles of partnership should include the following:

  • The names of everyone involved in the partnership
  • Where your business is being conducted
  • The purpose of the business
  • The terms of the partnership
  • When the partnership will begin
  • When and how the partnership will end
  • How much capital each partner is contributing
  • Each partner's percentage of interest in the partnership — is it different based on different monetary investments?
  • How and by whom decisions are made
  • How you’ll deal with conflict when it arises
  • How you’re going to distribute profits
  • How the partnership will be managed
  • How and under what conditions partnership rights can be transferred or sold

###General partnership agreement templates
But you don’t have to figure all of this out from scratch! And you likely don’t even need a lawyer to set up a general partnership. Here are some general partnership agreement templates to work from.

[LawDepot Free Partnership Agreement](https://www.lawdepot.com/contracts/partnership-agreement/?loc=US#.XKZvuutKj3A0
Legal Templates Free Partnership Agreement
Rocket Lawyer Partnership Agreement

##General partnerships versus other types of business entities
Not sure a general partnership agreement is the right type of business for you? Here’s how it compares to three other common types of business entities.

###GP vs. LLP
A limited liability partnership (LLP) is type of business structure in which all partners have limited liability for the business. While all of the partners in a GP are potentially liable, partners in an LLP can’t be held personally liable if the company — or one of their partners — is sued.

LLPs are especially attractive to certain types of businesses. Those include ones that are more likely to be sued and want protection like attorneys, doctors, accountants, and doctors, for example. Additionally, companies that currently or in the past were prohibited from forming an LLC (including accountants and attorneys) may also find the LLP structure appealing.

Like GPs, LLPs avoid double taxation.

###GP vs. LP
A limited partnership or LP is a type of business partnership that has two types of partners — general and limited — and there are different liabilities for the two.

General partners can be held personally liable, while limited partners cannot. Limited partners also can’t be involved in the day-to-day operation of the company, which means they can’t intervene even if they don’t like the way things are being run. If they do intervene, they can be converted to general partners and then held liable.

LPs avoid double taxation and pay taxes on the profits only on the personal tax returns of the members.

###GP vs. LLC
LLC means “limited liability corporation,” which is a type of business structure that creates a legal entity for the business that is separate from the owner. That means that the owner is usually not personally liable for the company’s debts or lawsuits, which is a big difference between LLCs and GPs.. Other common business entity structures such as corporations, general partnerships, or sole proprietorships do not offer the same protections.

##Other types of business entities
Not sure a general partnership is the right choice for your startup? Want to learn more about some other types of business entities? Don’t miss our guides to everything you need to know when you’re choosing the business formation that’s best for your startup.

What is a Corp?
S Corp
[What is a C Corp[(https://www.startups.com/library/expert-advice/what-is-a-c-corp)
What is a B Corp?
Limited Liability Companies (LLC’s): What You Need to Know
What is a Limited Partnership?
[Everything You Need to Know About Forming An LTD](https://www.startups.com/library/expert-advice/forming-a-ltd]
What Even is an "Inc.," Anyway?

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Tom D

Great help! Thanks for the template links, I also found this free one: https://www.lawdistrict.com/partnership-agreement/

Reply3 years ago

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