A general partnership is defined as an association of two or persons to carry on as co-owners a business for a profit. While no filing of papers with the state is required for formation, the partners must enter into a partnership agreement, which should be in writing. Because the agreement must cover all of the terms of the parties’ relationships, it is normally expensive and time consuming to draft an agreement to the satisfaction of all parties. Unfortunately, unlike a corporation, a partnership does not have the advantage of a comprehensive set of laws such as the GCL. For this reason, the partnership agreement should be as detailed as possible.
Usually, the partners will have equal rights of management. Through the partnership agreement, however, a partner’s right to manage the company may be limited. The partners may also designate specific partners to manage the company. Thus, the general partnership offers a great deal of flexibility in structuring the management of the company.
The major drawback to setting up your company as a general partnership is that each partner is jointly and severally liable for the obligations of the partnership. Because each partner is an agent of the partnership and can bind the partnership in the ordinary course of business, one partner will be held personally responsible for any action of the other partner if the act took place in the ordinary course of the company’s business. Thus, if your partner commits a fraud upon third persons within the ordinary course of business, you may be held personally responsible even though you knew nothing of your partner’s conduct. It is therefore imperative that you realistically anticipate a good working relationship with your partner before deciding to set up your business as a general partnership.
There is little continuity of life with a partnership. Without a written agreement to the contrary, the death, withdrawal, or bankruptcy of one partner will automatically dissolve the partnership. Moreover, any partner can have the partnership dissolved at any time. Joint ventures, or entities formed for a limited or temporary business purpose are treated as general partnerships.
It is difficult to transfer one’s interest in a partnership. That is because unless otherwise provided by agreement, a partner cannot transfer her interest without the consent of the other partners. Although a partner may transfer her economic interest in the partnership to third parties, a partner generally cannot transfer her voting rights or rights to participate in the management of the partnership.
Typically, capital is raised from partners’ capital contributions and secured and unsecured loans from third parties. Usually, there are no double taxation concerns with a partnership because the partnership does not pay any federal or state income tax. Instead, the partners are taxed directly based upon their receipt of income.