General Partner LLC: Everything You Need to Know
A general partner LLC, one of the most common types of partnerships, is arranged by two partners that have sole ownership of and liability for the business. 3 min read
2. Responsibilities of the General Partners
3. Advantages of a General Partner LLC
4. Disadvantages of a General Partner LLC
5. Forming a General Partnership
A general partner LLC, one of the most common types of partnerships, is arranged by two partners that have sole ownership of and liability for the business. This means they control all aspects of the business and are held financially responsible for its obligations and debts. A general partnership limited liability corporation (LLC) can be formed in a variety of ways, including orally or in writing.
Before you start the process of forming your general partner LLC, review the characteristics, advantages, disadvantages, and responsibilities associated with it.
Characteristics of a General Partnership
A general partnership LLC differs from the other types of partnerships in several ways. In a general partnership LLC:
- The owners are referred to as "partners".
- In absence of a partnership agreement, state partnership law applies.
- A partnership files a partnership tax return every year on Form 1065, but no tax is due; instead, each partner should file Schedule K-1, listing their share of the profits or losses for the year with their personal tax return.
- All partners are fully engaged in the day-to-day activities of the business and share full liability.
- Each partner has an equal right to manage the business enterprise as he or she sees fit, meaning any partner in a general partnership can act on behalf of the entire business without the other partners' knowledge or permission.
- Each general partner usually gets a single vote in decisions regarding key partnerships, with no regard to the amount of their capital contribution on an individual basis.
- Simple majorities normally determine the outcome of key business decisions.
- General partners need to have the ability to counsel their co-owners about specific business policies or ideas in pursuit of unified agreement between co-owners.
These characteristics are particularly appealing to those who own businesses in the legal and medical fields because the sharing of office space, staff, and resources is frequently considered a partnership.
Responsibilities of the General Partners
General partners are responsible for managing the day-to-day operations of the business. This includes:
- Acting on behalf of the business and the other partner(s), including making legally binding decisions.
- Remaining loyal and honest with the other partner(s) and not performing or conducting any tasks, transactions, or deals that risk the partnership.
- Controlling the partnership's finances and, as such, being held fully liable for the financial decisions, obligations, assets, and debts.
- Developing business policies, protocols, and agreements, including gaining the support of the other partner(s) to proceed with business policies, contracts, and ideas.
- Drafting and implementing a written operating agreement; although not required by law, a written agreement protects the partnership and the partners and outlines future activities.
For these responsibilities, general or active partners are given additional time to develop business plans for growth and development.
Advantages of a General Partner LLC
A general partnership LLC offers many advantages that can help grow your business. These include:
- Having complete control over how to form and run your business.
- Not having to pay filing fees to establish a partnership.
- Not being required to hold meetings, prepare meeting minutes, appoint officers, or issue shares of stock.
- Receiving guaranteed payments, including profits interests — a percentage of the partnership's profits — without having to contribute money to the business.
Disadvantages of a General Partner LLC
General partnerships are not without their disadvantages. Because the partners are held financially liable for their partnerships' debts and obligations, all partners risk:
- Being held personally liable for the general partnerships' debts and obligations to creditors, legal suits, and more.
- Having legal proceedings against the partnership itself, including the partners' assets (i.e., house or car).
- Having personal assets be subject to liquidation.
- Being personally liable for the actions of all other partners.
To mitigate or lessen their personal liability, partners should buy insurance to cover potential financial obligations as well as liabilities for injuries and loss.
In addition to the financial risks, partners should be aware that a general partnership does not exist separate from its owners, meaning any partner's death, withdrawal, or inability to conduct business essentially ends the partnership.
Forming a General Partnership
With proper planning, guidance, and an understanding of the advantages and disadvantages of a general partnership, business owners can form and maintain one and enjoy successful business growth and development.
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