Forming a business as a general partnership is one of the most common decisions made by budding entrepreneurs looking for a way to share resources and capitalize on the strengths of group efforts. However, forming a general partnership requires both significant effort and particular expertise. The ideal partnership extends beyond merely matching business interests to encompass both financial and legal considerations. The key is to ensure that these arrangements are comprehensive enough to address any eventualities. As such, when starting a general partnership, a business should consider five core areas.

First and foremost, it is important to understand the dynamics of the partnership. The overarching legal arrangement, known as a partnership agreement, should document all aspects of the joint venture. This document specifies the ownership structure of the business, as well as the expectations of each partner in terms of management, duties, and liabilities. To ensure that the agreement is enforceable, it should also be reviewed and filed with an attorney knowledgeable in the laws of California, the local entity in which the partnership is based.

Next, it is important to understand the legal liabilities of each partner. A general partnership's legal structure carries with it a unique risk that each partner is legally responsible for liabilities incurred by the business. While this associated risk is often distributed relatively democratically among partners, it is important to note that this type of structure does not provide the same level of liability protection as a limited liability company or a corporation.

It is also critical for a business to understand the tax implications and income distribution arrangements established by the partnership. As a general partnership, the business must submit a partnership tax return, and the partners themselves must declare their own income in individual returns. Furthermore, the allocation of profits must be determined by the respective members of the partnership and documented in the partnership agreement.

In addition, it is important for a company to understand the contractual and intellectual property considerations unique to the partnership. Contracts entered into by the partners should be carefully reviewed as to their legality and enforceability. Additionally, the partner's intellectual property should be documented, clearly articulating who owns which rights to such things as product designs, software, and trademarks. With respect to termination of the partnership, the agreement should clearly set out the procedures and terms that all party members are bound by.

Finally, it is critical for a business to understand the relative power dynamics of the agreed-upon partnership. To avoid potential conflict and disputes, the parties should recognize in advance who is most likely to to wield authority in the partnership and how particular decisions are to be made. This should be documented and provided to all the members of the partnership.

When forming a general partnership, the most important thing a business owner can do is to consult a local attorney knowledgeable of the laws and regulations of the region. The strategic use of legal resources can provide the foundation for a successful venture that is both legally sound and profitable.


General Partnership,

Legal Liabilities,

Tax Implications