Key Takeaways

  • In a general partnership, all partners share unlimited personal liability for debts, contracts, and legal claims.
  • Each partner can bind the business — and by extension, all partners — to legal obligations, even without mutual consent.
  • Personal assets may be at risk to satisfy business debts or legal judgments.
  • Strong partnership agreements, careful management, and liability insurance can significantly reduce exposure.
  • Partners should plan for risk allocation, dispute resolution, and exit strategies from the outset.

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.

Understanding Unlimited Liability and Personal Risk

One of the defining features — and greatest risks — of a general partnership is unlimited personal liability. Because there is no legal separation between the partners and the business, each general partner is personally liable for 100% of the partnership’s debts, legal obligations, and court judgments. This means that if the partnership’s assets cannot satisfy a debt or lawsuit, creditors can pursue partners’ personal property, such as bank accounts, vehicles, or real estate, to recover what’s owed.

Additionally, joint and several liability applies. This legal principle allows a creditor or plaintiff to collect the entire amount owed from any one partner, regardless of that partner’s level of involvement in the underlying obligation. For example, if one partner enters into a contract or commits a negligent act while acting on behalf of the partnership, all partners may be held equally responsible, even if they were unaware of the action.

In some cases, liability can extend beyond financial obligations. Partners might also face exposure for:

  • Breach of fiduciary duties – such as failing to act in the partnership’s best interest.
  • Tort claims – including negligence or wrongful acts committed by a partner during business operations.
  • Contract breaches – even if one partner signs without others’ approval, as long as they were acting within the scope of the partnership.

How to get Started

  1. 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.
  2. Attain the licenses you need to open your business legally.
  3. 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.

Risk Management and Liability Protection Strategies

While general partnership liability cannot be eliminated entirely, partners can significantly reduce exposure through proactive legal, financial, and operational strategies. Consider implementing the following measures from the outset:

  1. Draft a comprehensive partnership agreement.
    Clearly define the scope of each partner’s authority, decision-making responsibilities, and financial obligations. Include clauses on dispute resolution, partner withdrawal, indemnification, and how liabilities will be shared.
  2. Purchase liability insurance.
    Policies such as general liability insurance, professional liability coverage, or management liability insurance can provide critical protection in lawsuits alleging negligence, breach of duty, or other wrongful acts.
  3. Limit authority where possible.
    Establish internal policies requiring multiple partners to approve significant contracts, loans, or financial commitments to prevent unilateral decisions from creating unexpected liabilities.
  4. Maintain accurate records and documentation.
    Detailed records of decisions, contracts, and financial transactions help demonstrate that partners acted within their agreed-upon roles — a crucial defense in liability disputes.
  5. Consider restructuring the business.
    As the partnership grows, converting to a limited liability partnership (LLP) or limited liability company (LLC) can shield partners’ personal assets from business liabilities while preserving pass-through taxation benefits.

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.

Liability Considerations During Dissolution

Ending a general partnership does not automatically end liability. Partners remain responsible for obligations incurred before dissolution and must follow proper legal procedures to minimize future exposure. This includes:

  • Notifying creditors and clients of the partnership’s dissolution to prevent unauthorized obligations from being created in the partnership’s name.
  • Settling all outstanding debts and legal claims before distributing remaining assets.
  • Formally filing dissolution documents with the state (where required) to ensure public notice of the partnership’s termination.
  • Including indemnification clauses in the dissolution agreement to allocate responsibility for potential future claims arising from past business activities.

Failing to address liability at dissolution can leave former partners vulnerable to lawsuits or financial claims years after the partnership has ended.

Frequently Asked Questions

  1. Are partners personally liable for debts in a general partnership?
    Yes. All partners share unlimited personal liability for business debts, legal judgments, and obligations. Creditors can pursue personal assets if the partnership’s assets are insufficient.
  2. Can one partner’s actions create liability for the others?
    Yes. Under joint and several liability, any partner’s actions — including signing contracts or committing wrongful acts — can bind the partnership and make all partners liable.
  3. How can I protect my personal assets in a general partnership?
    Use a well-drafted partnership agreement, purchase liability insurance, limit partner authority, and consider restructuring as an LLP or LLC for additional protection.
  4. Does liability end when the partnership dissolves?
    No. Partners remain responsible for obligations incurred before dissolution. Properly winding up the business and notifying creditors is essential to limit future exposure.
  5. Can a partner be sued individually for partnership debts?
    Yes. Creditors can sue one or more partners individually for the full amount of a partnership debt, regardless of each partner’s share of responsibility.

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