A general partnership is the most common type of partnership. It is also the most basic type of partnership. It is an association of two or more individuals who intend to be co-owners of a business that is operated for profit. In general, a partnership is a business where the partners have not filed any papers with their state to become a corporation and/or a limited liability company (LLC).
Each partner 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 individuals in the partnership were intending to create a partnership. It only matters that they intend to proceed as co-owners of a business for profit. Whether this was intended can be determined by examining whether the parties have a right to control the business and whether they share in the profits.
A major difference between a general partnership and a limited partnership is that the general partnership does not dissolve immediately when one partner dies and/or if a partner is unable to continue in the partnership. A general partnership includes two or more individuals who agree to own and manage the business together. They also share in any profits and/or losses of the business.
In a general partnership, each partner is liable for the debts of the business. A partner may also bring tort, contract, and/or criminal liability onto the other partner because each partner is considered an agent of the other partner. The partners have a fiduciary duty to the partnership to act in its best interest. If a partner breaches that duty, another partner may sue them for damages resulting from the breach.
A limited partnership must have one or more limited partners and one or more general partners. At least one general partner is required. A limited partner does not make management choices for the business but a general partner does.
A general partner in a limited partnership assumes 100% of the risk of liabilities and/or debts of the partnership. A limited partner only risks up to the contributions they make to the partnership.
Usually, all partners share in the profits of the limited partnership. However, some of the investors can have limited liability, as noted above.
In a limited partnership, a limited partner may withdraw from the partnership at any time. The partnership continues because a limited partner does not normally share in the management duties and/or responsibilities of the partnership.
What is a Partnership Agreement?
A partnership is not required to have a partnership agreement. However, those who intentionally form a partnership will most likely include a partnership agreement. It is the contract that outlines the terms of operation for the partnership. It includes important information such as:
- 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.
Additionally, a partnership agreement may address property distribution in a partnership. Typically, in a general partnership, the partners share equally in the rights of any property that is classified as partnership property. The partnership agreement is an important document because it outlines the limits and scope of the partnership’s operation for the years to come.
How is a General Partnership Created?
In contrast to corporations and LLCs, partnerships do not require filing any paperwork with the Secretary of State. So long as each partner agrees to form the partnership and intends to share in all profits and losses of the business, a partnership is created.
Additionally, no written contract is required to create a partnership. It is, however, always advisable to create a partnership agreement with all the partners. The agreement binds the partners to the partnership and includes each partner’s rights and responsibilities to all losses and profits.
What is a Fiduciary Duty in a Partnership?
In a partnership, each partner owes the other partners a fiduciary duty, which is a form of trust. The fiduciary duty may differ depending on the nature of the partnership and what is outlined in the partnership agreement. Usually, statutory state laws govern the basic fiduciary duties. These laws will vary by state.
Depending on the partnership set up, the individual who owes a fiduciary duty will differ. In both limited and general partnerships, each limited partner and general partner owes a fiduciary duty.
This is because in both limited and general partnerships, any individual who manages the partnerships has a direct impact on the best interests and goals of the partnership. Additionally, both limited and general partners usually have management duties. The fiduciary duties owed by partners include:
- The duty of good faith and fair dealing;
- The duty of loyalty;
- The duty of care; and
- The duty of disclosure.
The fiduciary duty of good faith and fair dealing requires the partners to act honestly and fairly in their dealings that involve the partnership. This includes actions taken in order to reach the partnership’s mission statement and/or goals as well as in daily operations. This duty begins at the formation of the partnership and terminates when the partnership dissolves.
The duty of loyalty requires the partners to place the partnership’s best interests above their own personal interests. The partners shall avoid conflicts of interest between the partnership and any personal dealings. In other words, a partner cannot take an action that would harm the partnership for their own gain.
The duty of care requires partners to act prudently and competently towards any and all acts of managing the partnership. This duty of care is based on the reasonable person standard, or what a reasonable person in the same situation would do. In addition, pursuant to the business judgment rule, if a partner acted in good faith and with reasonable care, they will not be liable even if the act ends unfavorably for the partnership.
The duty of disclosure requires partners to inform other partners of all material acts. They must inform other partners regarding the consequences of their actions as well as the overall business health. In addition, if a partner’s decision includes a conflict of interest, they must disclose the conflict.
How Does Liability Work in a General Partnership?
All general partners are jointly and severally liable for any debts and/or losses incurred by the general partnership. In other words, each partner is separately responsible for the whole.
Any one partner can bind the partnership to any third party transaction even if the other partners did not consent. If the partner binding the partnership was acting within the scope of their partnership authority, they can bind the partnership. This means that all partners are personally liable for debts owed to third parties.
It is important for partners to be aware that by being part of the partnership, they may incur various risks and expose themselves to certain liabilities that they would not encounter if they were acting alone. The tradeoff is that a general partnership can allow more access to resources as well as more leverage in terms of marketing and other business activities.
Do Partnerships Pay Taxes?
Generally, no. A partnership does not pay taxes on its income. It is classified by the Internal Revenue Service (IRS) as a pass-through entity.
In a pass-through entity, individual partners pay taxes on their shares of the business income. Each partner is required to report their shares of any profits and/or losses of the partnership on their individual tax returns. Additionally, partners must pay self-employment tax on any partnership income.
Do I Need a Business Lawyer?
Yes, it is important to have the assistance of an experienced corporate lawyer for any general partnership issues. General partnership laws may be very specific and vary by state. They may also involve complex legal concepts.
A lawyer can help you through the process and ensure the general partnership conforms to the requirements of your state. In addition, a lawyer can represent you during any court proceedings in the event a dispute arises that requires litigation.