General Partnership Definition: The Top 5 Things to Consider
When deciding whether to form a general partnership, there are several important factors that must be taken into consideration3 min read
When deciding whether to form a general partnership, there are several important factors that must be taken into consideration. The purpose of this article is to provide a comprehensive overview of the top five things to consider when exploring the general partnership definition in the state of New York. As a business owner, it is important to be informed about the risks, benefits, and considerations for any business entity. By understanding the process and the potential consequences, entrepreneurs are better suited to make informed and smart decisions.
A general partnership is when two or more individuals join to form a business venture. Under this business formation, each partner is personally liable for the liabilities of the business. Further, each partner is also responsible for the actions of their partners. Thus, this entity formation type is often suitable for a variety of applications, such as technology and manufacturing businesses.
Knowing the top five things to consider when researching the general partnership definition is essential to expanding a business and making strategic decisions. Below we discuss the advantages, disadvantages, liabilities, pass-through tax status, and partnership agreement requirements.
1. Advantages and Disadvantages
Forming a general partnership offers several advantages and disadvantages, like any other type of business entity.
The primary advantage of forming a general partnership is the flexibility. Generally, a partnership is permitted to select their desired form of business organization without the requirement of filing with the state. Further, most partnerships don’t require to pay corporate taxes as the profits of the business pass-through to the partners and incur individual taxes.
On the other hand, forming a partnership may also create some liabilities that can be difficult to manage. Under this entity, each partner is personally liable for the liabilities of the business, meaning if the business cannot pay its debt or obligations, your partner’s assets could be taken away in order to settle the debt. Further, each partner is also held responsible for the actions of their partners, thus it is of the utmost importance to select the right partner to begin a business with.
2. Partners’ Liability
The liability of the two or more partners comprise a major factor for any general partnership. In general, each partner is personally liable for the debt and obligations of the business. Thus, a partnership is not the optimal choice for entrepreneurs wanting to avoid personal liability or separate assets from the business.
3. Partnership Tax Status
The taxation is the biggest advantage of forming a partnership. As opposed to an LLC or corporation, income and losses are allocated to the individual partners, bypassing the corporate taxes. This is known as the « pass-through » tax status.
All of the income and expenses related to a partnership are reported on the partner’s individual tax return and the partnership’s return is informational only to the IRS. In addition, as income passes through the partnership to the partners, it is usually only taxed one time. This feature of the pass-through status is very convenient and attractive compared to the corporation’s complex double taxation.
4. Partnership Agreement
A partnership agreement is a formal agreement that each partner signs and stipulates the conditions of the business. This document is not required to register the partnership in the state and federal level; however, it is a very important document to have in order to detail how the partnership is going to work on a day-to-day level.
Moreover, a partnership agreement should also include information about how the profits will be distributed, how disputes will be settled, and what happens to the business if one of the partners wishes to withdraw. It’s important to keep in mind that the state laws usually dictate the terms of a general partnership in place of a partnership agreement, thus, make sure to consult with an experienced business attorney beforehand.
5. Attorney Managed Services
When researching the general partnership definition, entrepreneurs should also consider utilising an attorney managed service. Whether it’s a one-time consultation or a full-service arrangement, UpCounsel is a great resource.
From small businesses to Fortune 1000 companies, UpCounsel’s extensive network of experienced attorneys can provide high-quality legal solutions at an affordable rate. All of UpCounsel’s online attorney profiles provide client ratings and reviews of recent work, so you can select the attorney of your choice.
Key point
Forming a general partnership is an ideal choice for many aspiring business owners. When deciding whether this entity is right for you, there are several critical factors to consider. The top five things to consider include advantages and disadvantages, partners’ liability, taxation, a partnership agreement, and attorney managed services.
With this comprehensive overview, entrepreneurs in the state of New York can now make an informed decision that best suits their needs.
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