Do you have a great idea to open a business with at least one other person? The general partnership is the simplest form of business for two or more people, as all you need to form one is to start working — there is no formation process to go through or paperwork to file.
Along with the sole proprietorship, the general partnership is an informal business structure that allows entrepreneurs to get their business ideas off the ground without any hassles like forming a business entity or paying registration fees with the state.
However, for all the convenience of a general partnership, it also has its fair share of drawbacks. In this article, we’ll discuss all of the pros and cons of operating a general partnership. Along the way, we hope to figure out whether this is the right type of business for you, or if you should form a different style of business entity.
What Is a General Partnership?
A general partnership is not a formal business entity, like a limited liability company (LLC) or a corporation. Instead, it is a basic entity structure that allows entrepreneurs and their partners to start working quickly, with no hassles or hoops to jump through. There are essentially zero rules and regulations to follow, and no government formation or maintenance fees to pay.
The general partnership is actually such a casual form of business that it doesn’t even have its own name. Because the general partnership is legally considered to be an extension of its owners as people, rather than a separate entity, the business name is the same as your owners’ personal names.
For instance, if your name is Kevin Thomas and you operate a general partnership with your friend Alice Anderson, the legal name of your business is simply “Kevin Thomas and Alice Anderson.”
Let’s take a look at some of the pros and cons of the general partnership, to help you get a better idea of whether this is the right business structure for you.
Pros and Cons of the General Partnership
- Easy to form and maintain: With a general partnership, you’ll never need to file any formation documents with the government. You will also never need to file an annual report, or pay any sort of registration or renewal fees with your state.
- No registered agent needed: All formal business entities in the United States are required to designate a registered agent. This is a person or business that accepts important document deliveries from the state on behalf of a business, giving the state a reliable point of contact for that company. However, because the general partnership is not a separate entity from its owners as people, there is no registered agent requirement.
- No personal asset protection: In our opinion, the general partnership’s lack of limited liability protection is easily its biggest disadvantage. With an LLC or a corporation, you receive personal asset protection that shields your personal house, car, bank accounts, and more if your business is sued. However, if you operate a general partnership, your creditors will have access to your business and personal assets.
- No business name exclusivity: We already mentioned that general partnerships are often referred to by their owners’ personal names. You can register a doing business as (DBA) name to use an assumed name for your general partnership, but you will not have any unique rights to the name. This means that another business can use the same name you registered, and you can’t do anything to stop them. With an LLC or corporation, your business name is exclusively reserved for your use and your use only.
- No taxation options: LLCs and, to a lesser extent, corporations are able to choose how they want to be treated by the IRS. However, a general partnership is strictly taxed as a pass-through entity, which means any profits “pass through” the business itself, and are claimed on each owner’s personal return.
- Self-employment taxes: Owning a general partnership is considered to be self-employment. This means each owner will have to pay self-employment tax, which is a 15.3% tax that includes the employer and employee shares of Medicare and Social Security tax. Keep in mind that this tax is charged in addition to any income taxes you may need to pay.
What Is a General Partnership Agreement?
You are not legally obligated to file a partnership agreement with the state, but it’s still crucial that anyone who starts a general partnership has one. A general partnership agreement is an internal document that represents a contract between the partners. It helps you keep your business organized, and it can also help settle potential disputes between you and your co-owner(s).
The information included in the general partnership agreement varies a bit depending on what kind of business you operate, but in general, it should include the following elements:
- Statement of purpose
- Plans for financial contributions and distributions
- Accounting guidelines
- How to add new partners
- How to remove a partner
- Voting processes
Is the General Partnership the Right Business Entity for Me?
To be honest, we almost never recommend that our readers operate businesses as general partnerships. Even though you can save some up-front money and hassle compared to forming an LLC or corporation, the risk of doing business without any sort of personal asset protection is not worth it.
If your business operates on an extremely tight budget, and if the products or services you sell don’t carry much (if any) liability, you might be able to get away with running your business as a general partnership. Other than that, we typically think operating a general partnership is a bad idea.
There are certainly some advantages to operating your business as a general partnership. Along with the sole proprietorship, the general partnership is the cheapest and easiest American business type to form and maintain. In addition, you don’t even need to designate a registered agent if you don’t want to.
On the other hand, general partnerships don’t have any personal asset protection. They also don’t have exclusivity regarding business names, and they don’t get to choose how they want to be taxed. For these reasons, we strongly recommend forming an LLC instead.
We hope this article helped you develop your understanding of general partnerships!