“”Coming together is a beginning, staying together is progress, and working together is success.” – Henry Ford
WHAT IS A BUSINESS
Think of a General Partnership like a team of basketball players. Every player on the team has to play the game, work on their own skills, and also work together with the rest of the team to win. In a General Partnership, each partner is involved in running the business, makes decisions, and shares in the profits (or losses).
A General Partnership is started when two or more people decide to go into business together. They don’t need to file anything special with the government (like you do with a corporation) – they just start doing business. However, it’s really important that they create a partnership agreement. This is like the rulebook for the team. It spells out how profits and losses will be divided, how decisions will be made, what happens if a partner wants to leave, and a bunch of other important stuff.
Just like a basketball player can get injured during a game, a partner can be personally liable in a General Partnership. This means that if the business owes money or gets into legal trouble, each partner can be held personally responsible. Their personal assets (like their house or car) could be used to pay off the business’s debts.
So, a General Partnership is a simple way for two or more people to start a business together, but it requires good teamwork, clear communication, and it comes with a level of risk for each partner.
Let’s break down the pros and cons of a General Partnership into basic, everyday terms.
Pros of a General Partnership
Shared Responsibility: Imagine you and a friend decide to go on a cross-country road trip. It’s a long journey, and there’s a lot to do. Someone has to drive, navigate, choose the music, find places to eat, book accommodations, and so on. If you had to do all this on your own, it would be exhausting! But since you have a friend with you, you can share these tasks. Maybe you drive while your friend navigates, and you switch roles halfway. You discuss where to stop for meals, what music to play, and which motels look best for the night.
This is what Shared Responsibility in a General Partnership is like. It’s a bit like going on a business road trip with a partner. Both of you bring your unique skills and strengths to the business, and you divide the tasks accordingly. For example, if you’re good with numbers and your partner is great with people, you might handle finances while they take care of customer relations. You’re both involved in making decisions and running the business.
This means you’re not alone in bearing the workload, you can support each other, and make decisions together. You share the profits, but also the losses. And just like on a road trip, it’s essential to communicate well and make sure you’re both heading in the same direction.
Easy to Form: Creating a General Partnership is a lot like deciding to start a rock band with your friend. You don’t need permission from any special music agency or government organization to start jamming out in your garage. You just get your instruments, agree on a few songs, and start practicing.
In the same way, forming a General Partnership is usually as simple as two or more people agreeing to start a business together. You don’t have to file any special paperwork with the government like you do with corporations. Essentially, you and your business partner shake hands, agree on how you’re going to run the business, and get started.
However, even though you don’t have to, it’s a really good idea to write a partnership agreement. This is like the setlist for your band. It outlines who is responsible for what, how profits and losses will be divided, how decisions will be made, and what happens if someone wants to leave the band – or in this case, the business.
But overall, the process to form a General Partnership is pretty straightforward and simple, making it an appealing option for many people starting a business with others.
Tax Advantages: Think about getting your paycheck from work. Normally, you’d have taxes taken out of your paycheck (this is called withholding), and then you have to report that income on your tax return at the end of the year. Sometimes, you might even have to pay more taxes when you file your return. This is kind of like being taxed twice, right?
A General Partnership has a tax advantage because it avoids this “double taxation”. Here’s how it works:
In a General Partnership, the business itself doesn’t pay any income taxes. Instead, the business income is divided between the partners based on their share in the business. This is like if your boss gave you and your coworker a task, and once it’s done, you split the reward.
The partners then report this income on their personal tax returns and pay taxes on it at their individual tax rates. This is much like how you report your paycheck income on your tax return. But the key difference here is that the income is only taxed once, not twice.
So, the tax advantage of a General Partnership is that it avoids double taxation and can lead to less overall tax paid by the partners. This can be a major plus when deciding what business structure to choose.
Cons of a General Partnership
Unlimited Liability: Let’s say you and your friend decide to build a treehouse together in your backyard. You both agree to share the costs of the materials. Unfortunately, your friend gets a bit carried away and orders way too many supplies, running up a huge bill. Because you agreed to share the costs, you’re now on the hook for half of that big bill, even though you didn’t make the decision to order all those supplies.
This is a lot like how Unlimited Liability works in a General Partnership. In a General Partnership, all partners share the responsibilities of the business, including any debts or legal problems. This means that if the business owes money or if it gets sued, all partners can be held personally responsible. And this isn’t limited to just the money you’ve put into the business – your personal assets, like your house, car, or personal savings, could be used to pay off the business’s debts.
So, while sharing the decision-making and profits in a partnership can be great, it also means you share in the liabilities. And in the case of a General Partnership, this liability is unlimited, meaning it can extend to your personal assets, which is a significant risk to consider.
Disagreements: Imagine you and a friend are deciding what movie to watch on a Saturday night. You want to watch an action film, but your friend wants to watch a romantic comedy. Both of you have strong opinions and can’t reach a decision. This disagreement can result in tension, and if not resolved, could potentially ruin your movie night.
Similarly, in a General Partnership, disagreements can happen quite frequently. Since all partners are equally involved in managing the business, different opinions are bound to arise about everything from daily operations to long-term business strategy.
One partner may want to invest more money to expand the business while the other wants to keep costs low and grow slowly. Or perhaps one partner believes in a more aggressive marketing strategy while the other prefers a more conservative approach. Such disagreements can lead to conflict and potentially harm the business if not properly managed.
That’s why it’s crucial to have a well-drafted partnership agreement that outlines how disagreements will be resolved. This is like having a pre-decided method for choosing a movie, like flipping a coin or taking turns choosing the movie. Having these procedures in place can help prevent disagreements from escalating and ensure the smooth running of your business.
Limited Life: Think about your favorite musical band. The band exists because of its members, right? If one member decides to leave the band or if, unfortunately, a member passes away, the band as you know it no longer exists. The remaining members might form a new band or continue with a new member, but it wouldn’t be the same original band.
The same principle applies to a General Partnership. The partnership exists because of the partners who formed it. If a partner leaves the business, or if a partner dies, the General Partnership typically ends. This is what we mean by “Limited Life.” The business does not have a life separate from its owners.
If the remaining partners want to continue the business, they would have to form a new partnership. This can lead to complications and instability, especially if the departing partner played a key role in the business.
So while a General Partnership can be easy to set up and run, its life is closely tied to its partners, and it can end abruptly under certain circumstances. This is an important factor to consider when deciding on a business structure.
So, while a general partnership allows you to share responsibilities and can be easy to set up, it also comes with risks like personal liability and potential disagreements.
Wrapping up our exploration of the General Partnership, it’s clear that this business structure presents both opportunities and challenges that are essential to consider for prospective entrepreneurs.
The General Partnership, first and foremost, provides the advantages of shared responsibility and ease of formation. This means you won’t be alone in managing the day-to-day operations of your business, and forming a General Partnership is typically less complicated than establishing other types of business structures. Further, tax advantages, such as profit and loss “passing through” to the partners, can also make a General Partnership attractive.
However, we’ve also discussed the potential pitfalls of a General Partnership. The unlimited liability means all partners are personally responsible for the business’s debts and liabilities, a reality that can expose personal assets to risk. Disagreements can also arise between partners if there’s no clear decision-making process, potentially leading to conflicts that can harm the business. Additionally, the issue of limited life can complicate continuity, as the business is directly tied to the partners involved.
Deciding whether a General Partnership is right for your business comes down to a careful evaluation of these factors. Assess your business goals, the level of risk you’re comfortable with, the dynamic between you and your potential partner(s), and your plans for the future. An open and honest discussion with your potential partner(s), along with advice from legal and financial professionals, can provide invaluable insight.
As we close this section on General Partnerships, remember that the choice of business structure has profound implications for the future of your enterprise. Always seek expert guidance and take the time needed to make an informed decision. In the end, the right business structure is the one that best supports your goals, suits your business type, and aligns with your risk tolerance.
Written by: John Reyes