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What is a general partnership?

On Behalf of | Jan 20, 2023 | Business Law |

Business organization presents the most complicated issues for a prospective business owner. The type of business and its mission statement, competition in the market and plans for growth matter, but so do other issues. Who will manage the business? How will I insulate myself from liability? How do I determine the distribution of profits? Does the business pay taxes or do I? The advantages afforded to the right individuals who choose a general partnership—the most common business organization—also come with several disadvantages.

What are the advantages?

A general partnership has a simple definition: Two or more people who enter into business together to earn a profit. Convenience ranks as the greatest advantage to general partnerships. They do not require registration with the state government. Second, partners can enter into contracts or business deals independently. Lastly, general partnerships are classified as pass-through entities, i.e., they pay no taxes. Partners report their distributions from the partnership’s profits on their personal income tax.

What are the disadvantages?

The greatest disadvantage of a partnership lies in liability. Each partner assumes unlimited personal liability, not only for their actions but also those of employees and other partners who bind the partnership. Four fiduciary duties partners owe each other arise in all partnerships at their formation and can protect partners:

  1. Duty of Good Faith
  2. Duty of Loyalty
  3. Duty of Disclosure
  4. Duty of Care

How can a partnership agreement help?

A partnership agreement serves as one of the most effective means to mitigate the risks of liability in a general partnership. These agreements also address issues such as compensation, management and control and other duties and privileges. In the absence of one, state laws follow one of two uniform acts that provide default rules on the duties and rights of each partner with some exceptions. For example, they will not supersede laws on how individuals or partners can recover damages in the event of a breach of one or more these duties.

A new business venture provides a challenge and a risk. In addition to the dynamics of the economy, operational factors can weigh heavily on the best option. Attorneys who are familiar with all the business organizations available in Texas can offer guidance.