What Is a General Partnership?
A General Partnership (GP) is the simplest structure for operating a business with multiple owners. The owners (“partners”) of a General Partnership share legal, financial, and management responsibilities for the company.
By default, a multi-owner business will be considered a General Partnership by the state if the owners do not file paperwork to establish an LLC (Limited Liability Company) or incorporate their company.
There is no limit to the number of partners a GP may have. Owners of a General Partnership are not considered employees of the company. They typically get paid by taking owner draws (withdrawing funds out of their business for personal use).
How do Income Taxes and Legal Liability Work in a General Partnership?
Similar to a Sole Proprietorship, a General Partnership is considered to be the same legal and tax-paying entity as its owners.
All general partners are personally liable for the legal and financial debts of the business. So, if a General Partnership runs into legal or money troubles, the owners’ personal assets are at risk of being taken to settle those obligations.
General Partnerships are “pass-through” entities for income tax purposes. Business profits and losses flow through to the partners’ personal tax returns. All of a GP’s profits are also subject to self-employment taxes (Medicare and Social Security) because partners are not on the company payroll and do not receive paychecks with Medicare and Social Security taxes deducted from them. Usually, partners must make quarterly estimated tax payments to the IRS, state, and local tax authorities.
Although General Partnerships don’t pay tax, they must file an annual information return (Schedule K-1, IRS Form 1065) with the IRS to report the income, deductions, gains, losses, etc. from their operations. Each partner then uses information from that form to report their share of the partnership’s income or loss on their individual tax returns.
How Do You Form a General Partnership?
A General Partnership is not a formal business entity like a Limited Liability Company or C Corporation. Usually, there is no business registration paperwork required by the state when entrepreneurs want to establish a GP. As soon as the owners begin to conduct business together, the partnership is established.
When a General Partnership’s owners do not want to include all of the partners’ last names in the business name, they must request to use a tradename. To do so, they need to file a DBA (“doing business as,” also known as a “fictitious name” filing). The DBA must be filed with the state or the county clerk—depending on the business’s location.
For example, if Janice Smith and James Jones want to market their new business by the name “Texas Taco Shack,” they would need to file a DBA for that name with the state or county clerk’s office. Many states also require that businesses have their fictitious name published in one or more approved newspapers or other publications in the county where it was filed.
Fictitious names may need to be renewed, so it’s important to verify the county and state requirements.
Keep in mind that registering a DBA does not provide any legal protection of the company name. Its purpose is to disclose the individual, people, or entity operating the company under the assumed name to the public. This helps protect potential customers, vendors, and others from doing business with unscrupulous owners attempting to hide their real identity. If a general partnership wants to obtain exclusive rights to use its DBA, it must register it as a trademark through the USPTO (U.S. Patent and Trademark Office).
To ensure that all partners are on the same page about the division of ownership and duties in a General Partnership, they should have a detailed partnership agreement. It’s wise to engage the expertise of an attorney so that all necessary provisions, terms, and conditions are included and represent the partners’ interests fairly.
If a GP’s partnership agreement allows or if the partners have signed a “buy-sell agreement” to enable remaining partners to buy the ownership rights of a departing partner, the business may continue to exist when partners pass away or leave the business. Otherwise, the partners may need to dissolve the company, following their state’s process and rules.
General Partnership Business Compliance Responsibilities
A General Partnership enjoys the simplicity of minimal ongoing compliance tasks. Several responsibilities partners may need to tend to include:
- Reporting and paying income and self-employment taxes.
- Renewing required licenses and permits (including sales tax permits, if applicable)
- Renewing DBAs
Keep in mind that states and local authorities may have other requirements GPs must fulfill, too.
Advantages and Disadvantages of General Partnerships
Pros of a General Partnership
- Easy to start (no need to register your business with the state).
- No corporate formalities or paperwork requirements, such as meeting minutes, bylaws, etc.
- You don’t need to absorb all the business losses on your own because the partners divide the profits and losses.
- Ownership flexibility – U.S. citizens, LLCs, corporations, and foreign individuals or entities may form a General Partnership by agreeing to do business in the U.S. with another party.
- Owners can deduct most business losses on their personal tax returns.
Cons of General Partnership
- Each owner is personally liable for the business’s debts and other liabilities. In fact, the actions of one partner could impose liability on the personal assets of another partner.
- In some states, each partner may be personally liable for another partner’s negligent actions or behavior (known as “joint and several liability”).
- Disputes among partners can unravel the business (though drafting a detailed partnership agreement can help you avoid this).
- It’s more challenging to get a business loan, land a big client, and build business credit without a registered business entity.
When Might the General Partnership Business Structure Be a Good Fit?
Operating a business as a GP might be advantageous when:
- When owners don’t intend to reinvest money back into the business.
- When a multi-owner business doesn’t want to deal with compliance formalities.
- When a multi-owner business has no employees.
- When a business provides products and services that have minimal legal risks associated with them.
When choosing whether a GP or other business entity type is the right fit, entrepreneurs should enlist a lawyer’s and accounting or tax professional’s expertise. There are many legal and tax ramifications to consider!
CorpNet Is Here to Help!
If you’ve decided that a General Partnership is the way to go for your business, CorpNet is here to help. No matter where you are in the U.S., our filing experts will prepare and submit your online forms to file a DBA, obtain business licenses and permits, and more—accurately and quickly.
Contact us today for personalized, fast, and affordable service as you get your general partnership up and running!