General Partnership Liability
General partnership liability means that all general partners are liable for business decisions.3 min read
General partnership liability means that all general partners are liable for business decisions. It is vital you understand what a partnership means, your liability risks, and what happens if you do not outline an iron clad agreement.
What is a General Partnership?
A general partnership is a is a business partnership with two or more people that have not filed corporation papers with the state. Each partner shares responsibilities for business revenues, debt, profits, losses, and operations. It is straightforward to set up a general partnership. However, that simplicity comes with significant risk: you and the business are one. Like a sole proprietorship, partners in a general partnership are personally liable for the company. You are personally responsible for business debt and lawsuits.
If you form a limited partnership, then only the general partner who runs the business is personally liable for lawsuits and business debt. The investing (or limited) partner is not personally liable for suits or debts. Limited partners only risk losing the money they put into to the business. Some partnerships start as a general partnership since it is simple to form. However, as the business grows, these partnerships should convert to a limited liability company (LLC) to decrease their liability.
Existence of a Partnership
The Uniform Partnership Act (UPA) Part II defines what constitutes a partnership.
- Sharing space or owning property does not establish a partnership.
- Also, splitting the gross returns from a jointly held property does not demonstrate a partnership in itself.
- To prove a partnership, you must show where you distributed profits between you and your partners as long as it was not paid for things like debt, interest, salary, or rent.
Advantages of a General Partnership
- General partnerships are easy to form.
- Converting from a general partnership to another business entity is easy.
- There is joint authority. Either general partner can obligate the business to a deal.
- Taxes pass-through to the general partners and may get further tax savings from tax cuts because of the partnership.
Disadvantages of a General Partnership
- Each general partner is 100% liable for the business debt and lawsuits. The creditor can choose to sue only one partner, whether or not that partner authorized the deal.
- Partnerships are difficult especially if there is a disagreement. Although you may not have insight to all your partners business dealings, you are liable for them.
- Even if you did not go into a partnership agreement with someone, specific actions imply it is a joint venture. If the person can do work in your name, for example, then it is a partnership by estoppel.
How to get Started
- Name your business. By default, the business name is the all the partners' surnames. If your name is Lisa Smith and your partner's name is Dave Allen, then the name of your business is “Smith & Allen.” If you would like to do business in another name, then register a “Doing Business As” (DBA) in your county.
- Attain the licenses you need to open your business legally.
- Create a written agreement between partners. It is not required, but it is recommended.
Issues to Address When Forming a Partnership
General partners should address partnership terms in an agreement to avoid misunderstandings. Additionally, if there are any gaps, the Revised Uniform Partnership Act (RUPA), enacted in 1994, fills the hole in your agreement.
- List the amount of capital each partner is investing in the partnership. If the business needs contributions in the future, list how much and by what date. Lastly, list the maximum amount a partner can contribute if there are such limits.
- Outline each partner's rights and responsibilities.
- Write what should happen to the company if one of the partners want to leave the partnership.
Ending a Partnership
Unless you have a buy-sell agreement, you must dissolve the corporation if a partner dies or wants to leave the company. You can avoid dissolution with a buy-sell agreement in your partnership agreement.
Before starting a partnership, make sure you understand the risks. Since you and your partners are separately liable for 100% of business debts and lawsuits, evaluate your risks against the rewards.
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