Typical Examples of a General Partnership

Not all entrepreneurs want to start a business on their own. Instead, they prefer to work with others to start and build their companies. One way to do this is by creating a general partnership, in which one or more people hold ownership and decision-making powers over a business. While this option carries with it some risk, many business partnerships are successful and provide an excellent income to their owners.

Partnership Business Examples

Unlike a sole proprietorship owned and managed by an individual, a partnership is a business owned by more than one person. There are several different types of legal structures for partnerships:

  • General Partnership: In a general partnership, all partners share in making management decisions and can make binding agreements on behalf of the business. Partners also share liability for losses, lawsuits and other adverse actions taken against the company.
  • Limited Liability Partnerships (LLP): A limited liability partnership is a legal agreement that limits the personal liability of partners. Partners don’t risk being wholly responsible for a company’s debts, nor are individual partners personally responsible for responding to lawsuits. 
  • Limited Partnerships: In a limited partnership, one or more owners are general partners, with full liability and decision-making authority. Limited partners have limited liability in case of business losses or other problems, but are also barred from making management decisions. 

Tip

Each state has its own rules and laws for starting a business. Typically, states require business owners to register the business and apply for one or more business licenses and permits. Check with your state, as well as the municipality in which your partnership operates, to determine which types of licenses, registrations, and permits you will need to start your business.

Advantages and Disadvantages of a General Partnership

In a general partnership, all partners have an equal share in the successes and failures of a business. Those choosing to operate a business under this type of organization should be aware of the advantages and disadvantages of opting for a partnership rather than a limited liability company (LLC) or standard corporate structure:

Advantages

Business partnerships can have many advantages. These include:

  • Increased capital: Partners often bring with them money and, in some cases, equipment, that can be used to support the business.
  • Talent sharing: When business partners have different talents, interests, and abilities, each can take on the kind of work that suits them, providing benefit to the entire company. For example, one partner in a web development company may be an expert in web design while the other partner has substantial experience in marketing and sales.
  • Divided responsibilities: A sole proprietorship is owned and managed by one person who has to wear many hats in the management and operation of a company. Many people just do not have the time or energy to run every aspect of a business on their own. A partner, or multiple partners, can distribute the workload between individuals, making a work-life balance possible.
  • Increased business networks: Each partner brings to the company her own business contacts. This expanded network can benefit the company through new strategic partnerships, increased numbers of client and customer prospects, and a greater pool of possible investors.
  • Tax advantages: In a general partnership, the business itself pays no federal income tax on its profits. These profits are shared by the individual partners who then pay taxes at the lower rate afforded by their individual tax returns.

Disadvantages

Partnerships can also be risky. Drawbacks include:

  • Personal liability: In a general partnership, all partners are liable for company debts as well as regulatory or criminal violations. Partners are also responsible for judgments as the result of a civil lawsuit. 
  • Continuity issues: Partnerships end when one partner dies, becomes incapacitated or leaves the business. This can put a business in jeopardy while the remaining partner or partners struggle to reorganize the company. 
  • Lack of communication and organization: Because partnerships are relatively straightforward legal structures and agreements, partners can find themselves confused about their roles in the business, as well as their responsibilities. This can lead to frustration that eventually erodes the business. All partners can be held personally responsible for actions taken by another partner, so poor accountability and role division can increase a company’s liability risk.

Evaluating Potential Business Partners

Entering a business partnership, particularly a general business partnership, opens an individual to a significant amount of risk. Before going into business with somebody, think carefully about whether this individual is somebody who is trustworthy and with whom you can make solid business decisions. You may also want to do some due diligence by investigating your potential partners financial and professional background. Here are a few things that you will want to consider:

  • Business background: Does the person you plan to partner with have experience in starting or running a business? If she has owned businesses in the past, learn more about them and why your potential partner is no longer an owner.
  • Professional credentials: It’s a good idea to verify the professional credentials of anyone you are considering going into business with. This includes checking with universities to verify earned degrees, and contacting state licensing boards to determine whether the individual’s professional licenses are in good standing.
  • Character and personality: If you don’t know a proposed business partner well, it is often worth it to spend some time with that individual so you can get to know them and see how they behave in a range of social and business settings. Asking him to provide personal and business references is another way to get a better idea of who this person is and how they could be expected to act while building and growing a business.
  • Financial assets and history: It is wise to verify a partner’s financial assets and credit history, particularly if she is offering to invest in. the business. In addition, a history of financial issues could point to the possibility that the potential partner makes poor financial decisions or increase the risk of financial impropriety, such as embezzlement of funds to pay debts.. 
  • History of lawsuits and judgments: Lawsuits and subsequent judgments are typically a matter of public record. A history of civil litigation is a significant red flag.

For the sake of transparency and accountability, you, and all of your potential partners could agree to undergo a professional background check that would address all of the above issues and then release the results to each other. Your attorney may also have suggestions as to what kind of personal investigations prospective partners should be willing to participate.

Warning

Going into business with a good. Friend or family member carries with it risks that go well beyond the possibility of financial loss or civil liability. Even close friends and relatives can find it challenging to try and run a business together. In addition, one partner’s mistakes, even those made in good faith, can cause significant financial hardship for the other owners. When a business partnership goes sour, long-standing friendships and even family ties can become strained. You’ll have to decide whether you are willing to accept such consequences if your business partnership doesn’t work out.

Ending a Partnership

Items often covered under articles of partnership include agreements regarding dissolving a partnership. Unfortunately, a general partnership doesn’t always offer a lot of flexibility in this area, which is why individuals who want the ability to exit an organization when it suits them should consider an alternative business structure.

While it indeed is possible for a partnership to end positively, such as when one partner buys out another partner’s share of the business, there are situations in which business partnerships end because of personal conflict or ongoing disagreements. Businesses have collapsed when partners cannot find a way to resolve their differences or to amicably sever their business relationship.