A general partnership is the most basic and most common type of partnership. A general partnership is an association of two or more individuals intending to be co-owners of a business for profit. Partnerships are generally a business where the partners have not filed any papers with the state to become a corporation or a limited liability company (LLC).
In a general partnership, each partner is held responsible for the profits, losses, and violations of all business activities. Some partners who are only investors of the business can have limited liability if the partnership is set up as a limited partnership. However, the partnership must have one general partner who would be personally liable for the debts of the business, while the limited partner will only be liable for the amount invested.
A partnership agreement is the contract that is used to define the terms of operation for the partnership. It will state important information including: the names of the partners, the name of the partnership, the purpose and aim of the partnership, termination provisions, profit divisions, and losses/liability specifications.
In addition, a partnership agreement may also address the issue of property distribution in a partnership. In most general partnerships, the partners share equally in the rights of any property that is classified as partnership property. The partnership agreement is a very important document, as it will outline the limits and scope of the partnership’s operation for the years to come.
Unlike corporations and LLC, a partnership does not require any papers to be filed with the Secretary of State. As long as each partner agrees to form the partnership and intends to share all the losses and profits of the business, a partnership is created.
In addition, there is no written contract required to create a partnership. However, it would be a good idea to create a partnership agreement with all the partners. The partnership agreement would bind all the partners to the partnership and would include each partners rights and responsibilities to all profits and losses.
General partners are individually and jointly responsible for any losses or debts incurred by the general partnership. Any individual partner can make the partnership be bound to any 3rd party transactions entered into by the partner even if the other partners did not consent to the deal. If the partner was acting within the scope of his partnership authority, any partner can bind the other partners to the 3rd party transaction. This means that all others partners would be personally liable for the debt owed to 3rd party.
Thus, partners should understand that by being part of a partnership, they may be incurring various risks and exposing themselves to certain liabilities that would not exist if they were acting alone. However, the tradeoff is that general partnerships often allow for more access to resources, and more leverage in terms of marketing and other business activities.
General partnership laws can sometimes be very specific and can involve some complex legal concepts. It may be necessary for you to hire a business lawyer in your area for help with the creation of a general partnership. Your lawyer can guide you through the process to ensure that the business entity conforms to state requirements. Also, your lawyer can represent you in court in the event that a legal dispute needs to be litigated.