When two or more people wish to create a new business together, they must decide which type of business entity best suits their new venture. Among the choices available to U.S. businesses, the general partnership is a traditional yet still popular choice. A general partnership has fewer administrative and legal requirements than other forms of business. It treats all owners as equal partners in the business and assumes that each partner has an equal business and personal liability. A general partnership is commonly adopted by professionals and small-business owners who want to reduce the complexities of owning and operating a business, leaving them free to concentrate on the business itself.
Definition of a General Partnership
In the U.S., a general partnership is a business structure where two or more partners agree to share in both the assets and liabilities, as well as the profits, of a business. The partnership structure generally carries fewer legal requirements than the more formal business structures, such as a corporation. By default, each partner enjoys equal ownership, management and legal authority over the business.
Note that referring to a "partnership" between two existing companies does not create a general partnership business structure. Companies can refer to partnering with each other for some purpose, but these are usually governed by more formal joint venture contracts that govern a specific undertaking, not an entire business.
Taxes do not flow through a general partnership as they do with a corporation. Instead, each partner's "draw" (percentage of profits) is declared as income on their respective personal income tax returns.
While a general partnership is more straightforward to set up and administer, it also carries additional risk for each partner. For financial and legal liability purposes, each partner is viewed as the business itself. So if the general partnership incurs a debt, each general partner is also individually liable for that debt. If the business doesn't pay that debt, the creditor can sue each partner and force them to repay the balance.
Because of the unique properties of the general partnership structure, it has become a popular choice for professional services providers who wish to go into business with each other.
Small law firms often adopt the general partnership format for their business entities. The partnership is easy to set up and requires less administrative paperwork over the life of the business, as well.
The general partnership is well-suited for a professional services business model involving two or three primary service providers. The law firm's name will generally include the last names of each partner, such as “Law Offices of Smith & Jones,” or “Smith, Jones & Reed, Attorneys at Law.”
The same qualities that make a general partnership attractive to attorneys also apply to physicians building a medical practice. Physicians often choose to start a business based on a general partnership to minimize the financial and legal risks of operating a medical practice alone.
Another advantage of the general partnership form to practicing doctors is the strength it can lend to applications for business startup loans. Newly licensed physicians, who may be carrying lots of personal student loan debt, are wise to team up with partners who have better credit ratings, making them more credible borrowers to commercial lenders.
As with all businesses formed through the general partnership structure, partnering physicians will risk personal exposure to business liabilities, including debts and legal claims. For example, a major medical malpractice lawsuit against one physician can affect all other partners who share, and ultimately assume, the liability of the business.
Licensed architects and design professionals often go into business together as general partners. Architects who share the same design philosophy and want to reduce startup and operation costs may choose to team up in a general partnership to reduce costs and administrative requirements.
The reduced legal and financial paperwork of the general partnership allows each of the architects to focus on individual strengths and interests, such as creativity, design ability or leadership skills. At the same time, each partner maintains an equal share in the management and decision-making responsibilities of the business.
The general partnership structure is beneficial to architects who do not have a portfolio and have little practical experience. Partnering with a more experienced professional helps these new architects practice their profession without assuming all the risks of business ownership on their own.
A general partnership is the ideal business structure for relatives, including spousal co-owners. The general partnership is the default structure for spouses who want to launch a business together but who do not wish to incorporate. Spouses who go into business together are typically classified as a partnership for the ease of startup and tax purposes.
Depending on the type of business, spouses can also elect not to be treated as a partnership when filing federal income taxes so they can maximize credits for Social Security and Medicare taxes.