As a business management structure, a general partnership is the most common and basic type of partnership. It is an association of two or more people who intend to be co-owners of a business that is operated for profit. Generally speaking, the partners have not filed any papers with their state in order to become a corporation or a limited liability company (“LLC”).
Each partner who is involved in a general partnership is held responsible for the losses, profits, and violations of any and all business activities. It does not matter whether the people in the partnership intend to create a partnership; it only matters that they intend to proceed as co-owners of a business for profit. This intention can be determined by considering whether the parties have a right to control the business and whether they share in the profits.
The defining difference between a general partnership and a limited partnership is that the general partnership does not dissolve immediately when one partner dies, or if one partner is unable to continue in the partnership.
Under a general partnership, each partner is liable for the debts of the business. Additionally, a partner may bring tort, contract,or criminal liability onto the other partner, due to the fact that each partner is considered an agent of the other partner. What this means is that the partners have a fiduciary duty to the partnership to act in its best interest. As such, if a partner breaches that duty, another partner may sue them for any damages resulting from the breach.
At least one general partner is required, meaning a limited partnership must have one or more limited partners, and one or more general partners. A limited partner does not make management choices for the business, while a general partner does.
Additionally, a general partner in a limited partnership assumes 100% of the risk of liabilities and/or debts of the partnership, while a limited partner only risks up to the contributions that they make to the partnership. In general, all partners share in the profits of the limited partnership. However, some of the investors can have limited liability.
In a limited partnership, a limited partner may withdraw from the partnership at any time without ending the partnership. The partnership continues because a limited partner does not commonly share in the management duties and responsibilities of the partnership.
How Is A General Partnership Created?
In contrast to corporations and LLCs, partnerships do not require filing any paperwork with the Secretary of State. Meaning, as long as each partner agrees to form the partnership and intends to share in all of the profits and losses of the business, a partnership is created.
Additionally, no written contract is required to create a partnership. However, it is always advisable to create a partnership agreement with all of the partners. Such an agreement binds the partners to the partnership, and includes each partner’s rights and responsibilities to all losses and profits.
Those who intentionally form a partnership will generally include a partnership agreement. To reiterate, this is the contract that outlines the terms of operation for the partnership. The document includes important information, such as:
- The names of the partners and the partnership;
- The purpose and goal of the partnership;
- Termination provisions;
- Profit divisions; and
- Losses and liability specifications.
Additionally, a partnership agreement may cover property distribution in a partnership. In a general partnership, the partners most commonly share equally in the rights of any property that is classified as partnership property. This is an important document because it outlines the limits and scope of the partnership’s operation for the years to come, and can be used to resolve any future disputes.
How Do I Dissolve A General Partnership?
When dissolving a general partnership, it is crucial to dissolve it properly in order to ensure that the liabilities are ended according to the partnership agreement.
Generally speaking, it is advised to include a general provision which details dissolution in the partnership agreement. This should specify the procedures that are necessary in order to dissolve the partnership, as well as any terms that dissolution is contingent upon. However, not all partnerships have a dissolution provision included in their agreement.
If you are in this situation, you and your partners can hold a meeting to decide the terms of dissolution together. This should be done to ensure that all partners are on board. If this is not successful, you can hire a third party to mediate the issues. If there is still no resolution, you can take legal action and request for an order on dissolution.
The parties who are drafting the partnership dissolution agreement should clarify the procedures that are needed to divide the liabilities. Before signing the agreement, it is important to ensure that all of the duties and obligations have been agreed upon under the provisions of the partnership, and as such no obligation remains outstanding.
Some other examples of the various dissolution tasks include, but may not be limited to:
- Cancel all licenses, permits, and registrations that were handled under the partnership;
- Notify creditors so that their accounts can be taken care of;
- Properly file all of the remaining tax documents, and inform the federal, state, and local tax agencies that your partnership has dissolved;
- Any contracts, leases, and agreements under the partnership should also be terminated so that there are no outstanding obligations under any of them; and
- Close all of the bank accounts that are associated with the partnership.
Are There Any State Laws About Dissolving A General Partnership?
Each state varies in terms of the method of dissolving a general partnership. As such, it is crucial to research your local state business laws in order to adequately dissolve your partnership. Because the dissolution of general partnership is governed by state laws, they are handled by your state’s Secretary of State office, who will be useful in determining all of the applicable rules, fees, and forms for the dissolution of a general partnership.
Most states require filing a formal statement for the dissolution; in some states, this is also known as a certificate of cancellation. Additionally, there is a set amount of time in which the form must be submitted in order to be properly processed by the office. You will also need to notify your clients to inform them about your decision of ending the business, and contact your suppliers and customers in order to publicly announce that your company is no longer in business and the partnership ended.
Do I Need A Lawyer To Dissolve A General Partnership?
Closing accounts and distributing the remaining assets after paying the debts can create conflicts, especially if there is no partnership dissolution agreement. If you are currently in a partnership and would like to dissolve the partnership, you should consult with a corporate lawyer.
The lawyer can assist with the dissolution process and will represent you in court as needed. If you are currently in a general partnership, a general partnership attorney can help you draft a partnership dissolution agreement for the future.