What You Should Know about General Partnerships
By: Barry E. Haimo, Esq.
February 24, 2025
Like sole proprietorships, general partnerships don’t require any filings and are created automatically. This makes them simultaneously convenient and dangerous.
Because of this, general partnerships have their purpose but are typically not recommended. Relative to the other options and the benefit of those options, each of the partners will be subject to unnecessary liability exposure.
Let’s dive into some more specifics about general partnerships.
General Partnerships: Easy to Form, Dangerous to Manage
The below video provides a quick overview of how general partnerships work.
Read Transcript
Hi. This is Barry Haimo. Thanks for stopping by for another dose of Bite-sized Bits of Knowledge, where we give you meaningful information in a short amount of time. Today, we’re talking about general partnerships, and all you need to know about general partnerships.
So it’s very interesting that most people don’t realize that just doing anything collaboratively with another person with a profit motive makes you in a general partnership under the common law. And that is a very dangerous proposition.
That’s because general partners have duties to each other that you probably didn’t know you had. And there’s also obligations imposed upon one another to the partnership that you also probably didn’t know you had.
So it’s important to understand what you’re getting into before you get yourself into trouble. And as we’re going to discuss in another video, I just cannot overemphasize the need for a partnership agreement.
So let’s start talking about general partnerships. First: formation. Just like sole proprietorships, there’s no formation required, there’s no state filing. As I said, it’s just two people collaboratively working together for profit. That, under the common law, creates a general partnership.
Again, I highly recommend a partnership agreement. We’ll get into that.
The number of owners, obviously, is a minimum of two. Raising capital – you can do it much more easily than a sole proprietorship because you can just add more partners. In terms of length of existence, well, it could dissolve on death or withdrawal of a partner unless the partnership agreement says otherwise. So that’s an example of a default rule that really could be disruptive to your business if you find yourself having to dissolve because you didn’t know the rules.
In terms of operational requirements, there’s very few. The partners are both pretty much overlapping with management, which we’re going to get into next. Each partner really has an equal voice, and more importantly each partner is an agent and manager or board member, if you would, of the partnership. So you can have multiple partners running around binding the partnership really without the other partners’ consent. And that’s very scary to a lawyer. That’s very scary. So again, another reason to have a partnership agreement, to get all that stuff tightened up pretty good.
In terms of limitation of liability, partnerships are like sole proprietorships. There’s virtually none. There’s none. They have an unlimited personal liability exposure of each partner. What does that mean? That means that if, again, the partnership has liabilities, debts, credit cards, leases, contracts, slips and falls, personal injury lawsuits, product liability lawsuits, it overlaps into each of the partners’ assets. And so you can find these business creditors coming after your personal assets. Which, again, as a lawyer who does what I do, it’s very scary and it’s totally unnecessary.
Regarding taxation, it’s taxed one time. Really, the partnership doesn’t pay tax at all. It just reports the tax and it flows through to each of the partners’ respective K-1. That’s what it’s called. It’s a form K-1, where each partner reports its share of the profits and losses on its personal 1040 and pays taxes based on its personal taxes based on its personal rates, as opposed to a corporate tax schedule.
In terms of interest transferability, yes, you can absolutely transfer interest, but just like the sole proprietorship, it’s really transferring the assets. If you have a commercial property, for example, you’re transferring the property, you’re transferring the contracts, the leases, the intellectual property, the customer information. That’s like your assets. Maybe you have a name, a trademark, that kind of stuff. But you’re really not transferring equity in a company because no company exists. There’s no formation of a legal entity, really.
In terms of allocation of available cash. As you start to be profitable, you accumulate cash, and you may want to distribute that cash to the partners. Well, default rule will kick in, and you’ve got to do it a certain way, whether you like it or not. But you have the power and the right to change all that stuff in your partnership agreement. And again, I can’t encourage you enough to do that.
Again, investors generally want things to be different than what the default rules are. They want to get paid back first. They want maybe a preferred return. They want protections. They want allocations of profits and losses to them first. They’re very flexible.
Dissolutions, meaning closing the business, it’s very easy, just like a sole proprietorship. It’s not as easy, but it’s easy. General partnerships are best suited for multi-owner businesses desiring limited personal liability, but inflexibility in management and distributions and tax.
Generally, when you do a general partnership, it’s more of a joint venture between other companies so that, again, the shareholders – the general partner’s personal assets are not vulnerable to the business. But even then, I still wouldn’t recommend it. I still would not recommend it. There’s just better alternatives that don’t have unnecessary risk.
So obviously, the bottom line with partnerships is that they’re easy to form, they’re dangerous to manage, unlimited personal liability, and they’re just completely unnecessary. So I don’t like them.
Again, I want to remind you we have a really informative free Florida formation checklist. The link is in our description. And we also have a free business planning stress test. So please download those at your convenience. Thank you for stopping by, and stay tuned for more.
Okay, now that we’ve told you not to form a general partnership, it only seems fair to offer some arguments for the other side.
Why Some People Might Consider Forming a General Partnership
If any of the following apply to your goals and business model, there are reasons to at least think about a general partnership:
You Don’t Want the Business to Pay Income Taxes: General partnerships, as a business, do not have to pay income tax. All of the general partnership’s profits and losses run through the partner. A separate tax return must be filed for the general partnership, but partners are not treated as employees and income is not taxable for the business. In other words, the personal income taxes the partners pay are the business taxes.
You Want Your Business Up and Running in a Week: Setting up a general partnership is relatively easy and requires virtually no paperwork.
You Want an Inexpensive Structure: In addition to the ease of formation, general partnerships are also relatively inexpensive to form. General partners are, however, responsible for putting capital into the general partnership.
You Want Control of Management and Profits: General partnerships are defined by their ability to split management responsibilities between all partners. Whether this is an equal split or an agreed split between multiple partners, each party controls their share in the partnership. Be aware that with this control comes liability and responsibility. As a result, all partners are personally liable for any losses or debts that the general partnership takes on.
You Have Specific Aspects of the Business You Want to Control: If you are a general partner, you don’t have many restrictions or requirements for management duties. General partnerships are very flexible, and the structure and operation of the business can be solely controlled by the general partners.
You Want Flexibility, Beginning to End: Flexibility and ease applies to more than just the formation of a general partnership. If one of the partners wants to dissolve the partnership, the process is simple. General partnerships are typically more suitable for short-term projects, but a short-term business plan should not be deterred from starting a general partnership.
What Are the Governing Documents for General Partnerships?
As mentioned above, general partnerships are frighteningly easy to set up. You don’t need to do anything besides work with someone to make a profit. That being said, a gesture or an oral agreement do not always cut it when you are making big decisions or determining liability.
Because of this, partnership agreements are often drawn up in good business planning. They serve to clarify each partner’s role and how their ownership affects their position in the partnership.
Let’s take a closer look.
How Agreements for General Partnerships Work
Partnership agreements are essentially a contract drawn up by all of the partners. They are used as a resource and a binding agreement when disputes or disagreements in operations arise.
As with any governing document, these documents should be written with the specific partnership or business in mind.
Here are a few elements that are commonly found in partnership agreements:
Ownership. The amount of ownership each partner has in the partnership is crucial to determining each partner’s influence, role, and voting rights when making important decisions. The partnership agreement should give a brief outline of each partner’s percentage of ownership. This can and should be adjusted as ownership changes over time.
Allocation of Profits and Losses. In many partnerships, this is determined by ownership. However, some partnerships handle the allocation of profits and losses differently. This should be laid out in the partnership agreement. For example, one partner contributes money and the other contributes services. Generally the “money partner” will receive a greater allocation of profits and losses until repaid plus a percentage interest before returning to pro rata.
Binding Rules. Depending on the size and status of your partnership, each partner may want to be aware or give consent before any obligations or binding agreements are made. This process should be laid out in the partnership agreements. This can help to avoid any deals that would upset or blindside other partners.
Voting and the Decision-making Process. Again, these processes are usually determined by ownership: partners with a higher percentage of ownership usually have more influence or more votes when coming to a decision. This part of the partnership agreements should not only lay out who makes big decisions, but also how those decisions are made. This allows the business to move in a timely fashion and continue to progress. Sometimes the partners can negotiate a greater degree of control than would otherwise be represented by number of shares.
Conflicts and Exiting Partnership Agreements
Disputes. If a decision cannot be made or a disagreement arises between two or more partners, a partnership agreement serves as a good guide for coming to an agreement and resolving the dispute.
Exiting the Partnership. General partnerships do not last forever. If a partner wants to exit the partnership (or if a partner suddenly dies or becomes mentally incapacitated/ passes away), the partnership agreement should lay out the procedures for removing the partner and allocating their duties, responsibilities, and so on to the other partners.
Adjustments to Partnership Agreements
If adjustments or changes need to be made to a partnership agreement, they should be done in a timely manner. These changes can shift the economic and tax situation for different partners.
Also, all partners involved in the agreement must approve most changes to general partnership documents. You can, however, add a clause in the partnership agreement that will determine how these changes can be made and who must be present for the changes to become official.
The Bottom Line in Partnership Agreements
Keep your attorney’s number on hand while you and the other partners write a partnership agreement. Better yet, have your attorney draft the document. He or she can advise you on what should be included in a partnership agreement and how different decisions may affect you and your income down the road.
Or, you know, choose a different business structure all-together. Set up a consultation today and we’ll be happy to walk you through which options seem best for you.
Download our FREE:
Business planning stress test
https://legacy.haimolaw.com/Business-Planning-Stress-Test
Florida business entity comparison chart
https://legacy.haimolaw.com/business-entity-comparison-chart
Additional Resources:
Video Ads Mastermind business accelerator from the highly credentialed Tall Oak Consulting; helps businesses level up in a straight line, minimizing the painful process of learning and adjusting, to achieve founders’ particular goals.
https://haimolaw.krtra.com/t/1wUjsqaKxza4
99 Designs – economical design for your initial IP
https://99designs.qvig.net/n1o0E7
Originally published 11/18/2021. Updated 02/24/2025.
Author:
Barry E. Haimo, Esq.
Haimo Law
Strategic Planning With Purpose®
Email: barry@haimolaw.com
YouTube: http://www.youtube.com/user/haimolawtv
YOU ARE NOT OUR CLIENT UNLESS WE EXECUTE A WRITTEN AGREEMENT TO THAT EFFECT. MOREOVER, THE INFORMATION CONTAINED HEREIN IS INTENDED FOR INFORMATIONAL PURPOSES ONLY. EACH SITUATION IS HIGHLY FACT SPECIFIC AND EXCEPTIONS OFTEN EXIST TO GENERAL RULES. DO NOT RELY ON THIS INFORMATION, AS A CONSULTATION TO UNDERSTAND THE FACTS AND THE CLIENT’S NEEDS AND GOALS IS NECESSARY. ULTIMATELY WE MUST BE RETAINED TO PROVIDE LEGAL ADVICE AND REPRESENTATION. THIS INFORMATION IS PROVIDED AS A COURTESY AND, ACCORDINGLY, DOES NOT CONSTITUTE LEGAL ADVICE.
