Key Takeaways

  • General partnership liability is unlimited: Partners are personally liable for debts, lawsuits, and obligations.
  • Joint and several liability apply: Each partner can be held fully responsible for the actions or debts of others.
  • A partnership agreement is critical to clarify responsibilities and reduce disputes.
  • General partners face risks from negligence or wrongful acts of themselves, other partners, or employees.
  • Insurance options exist (e.g., management liability insurance) to help mitigate personal financial exposure.

General partner liability means when you enter a general partnership, the personal liability you incur is unlimited. Three types of partnerships exist: limited, general, and limited liability partnerships. Each kind of partnership assigns a different degree of liability and liability protection to owners.

Personal and Partnership Liability

Your personal liability and your partnership liability can vary when you enter a business partnership.

  • The partnership liability you accept is based on the type of partnership you enter.
  • It's also affected by the position you hold in your partnership.
  • State laws also affect your partnership liability.
  • Under partnership rules, all partners have the responsibility to pay off any debts the business incurs.
  • This holds true even if only one partner was involved in something like entering a bad contract, or if one gets into an accident while on the job.

Joint and Several Liability in Practice

In a general partnership, partners are not only jointly responsible for the business’s debts but also severally liable. This means a creditor can pursue any single partner for the entire debt if the business defaults, regardless of each partner’s ownership share. For example, if one partner causes harm through negligence, all partners could be sued for damages. This shared liability extends to employee actions taken under the partnership’s authority.

Severally Liable

A lot of states hold partners severally liable. In these states, if the partner who entered into a bad contract isn't able to cover its cost but another partner is able to, the court judgment requires that the other partner pays for the bad contract. If you're in the position of being the other partner, the amount of the business that you own, or the percentage, won't have any effect on the judgment.

Common Risks of General Partnership Liability

Operating as a general partnership exposes partners to several legal and financial risks:

  • Unlimited personal liability: A partner’s personal assets can be seized to cover partnership debts.
  • Liability for others’ actions: Partners are liable for contracts, torts, and mistakes made by other partners or employees.
  • Difficulty managing disputes: Without a clear agreement, disagreements over liability, contributions, and authority can disrupt operations.
  • Increased exposure as business grows: As a partnership scales, liabilities often grow, increasing personal risk.

No Need to Set Up a General Partnership

While other forms of partnerships and business entities need to be set up or established, general partnerships don't have that requirement. No specific intent is required in order to form a general partnership. All that's required to prove a general partnership exists is being able to establish that two or more people are performing acts of business together.

Importance of a Written Partnership Agreement

Although a general partnership can form without formal paperwork, having a written partnership agreement is crucial to define:

  • Partner contributions
  • Profit and loss sharing
  • Decision-making authority
  • Procedures for resolving disputes
  • Terms for dissolving the partnership
    A clear agreement helps avoid misunderstandings and provides a roadmap for managing liability exposure.

The General Partner's Role in Limited Partnerships

The liability held by one or multiple partners is limited when in a limited partnership or LP. A minimum of one general partner and one limited partner is required when establishing an LP. The general partner in an LP is endowed with the full responsibility and power of managing the business, and he or she is assigned unlimited personal liability if something goes wrong. Limited partnership agreements resemble general partnership agreements in this matter.

Insurance Options to Reduce General Partnership Liability

General partners may consider management liability insurance or similar policies to protect against lawsuits claiming:

  • Breach of duty
  • Negligence
  • Errors or omissions
  • Misstatements
    These insurance products can cover legal defense costs and settlements, offering a financial buffer against personal exposure.

The Limited Partner's Role in Limited Partnerships

The sole determinant of the limited partner's liability is calculated by the percentage of the investment he or she made in the partner show. The limited partner is also protected in regard to his or her involvement in managing the business. If, however, the limited partner becomes more involved in managing the business, then his or her liability in the partnership becomes equal to that of the general partner.

Limited Liability Partnership Protections

Partners in a limited liability partnership or LLP, have a bit more protection from errors made by one another. As an example, if one partner in an LLP gets sued by a client, the other partners in the LLP aren't personally liable for the judgment, in the event that there is a judgment. Just like in other partnership structures, the LLP owners are legally required to cover contracts signed by the partners.

Exploring Alternatives to Limit Liability

Business owners concerned about general partnership liability may explore alternative structures:

  • Limited Liability Partnership (LLP): Provides partners with liability protection similar to a corporation while retaining partnership tax benefits.
  • Limited Liability Limited Partnership (LLLP): Adds liability protection for general partners within a limited partnership structure.
  • Forming an LLC or Corporation: These entities protect personal assets from business debts and claims.
    Each alternative has different registration, tax, and management implications, and legal advice is recommended to choose the best fit.

The Importance of Choosing a Trustworthy Partner

This draws attention to the importance of going into business with trustworthy people. It also draws attention to the importance of preparing a detailed partnership agreement that clarifies the liabilities of each partner. An attorney who specializes in business can help you work your way through the personal liability details of the partnership agreement. Your attorney can also make sure you understand the positive and negative aspects of partnership in comparison to other types of business structures.

Partnerships are formed when two or more people make a decision and enter into an agreement to run a business together. The agreement can be oral or written. With a general partnership, the people need only have an intention to engage in business activities together in order to form it. Local and state filings aren't required to form a general partnership, though the partners do have to file the appropriate tax forms. Partnerships and corporations are not the same because corporations don't exist until documents called the articles of incorporation are filed with the appropriate secretary of state.

Frequently Asked Questions

  1. Can one partner be sued for the whole partnership debt?
    Yes. Under joint and several liability, a creditor can sue any partner for the entire debt.
  2. How can I protect myself from general partnership liability?
    You can consider insurance, a written partnership agreement, or forming an LLP or LLC to limit liability.
  3. Are general partnerships taxed separately?
    No. Profits and losses pass through to partners’ personal tax returns.
  4. What’s the difference between general and limited partnerships?
    General partners have unlimited liability; limited partners have liability limited to their investment.
  5. Is insurance required for a general partnership?
    Not required, but highly recommended to protect partners from lawsuits alleging negligence or breach of duty.

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