In part two of our series on choosing the proper business structure for you, we’re moving on to business partnerships. Interestingly, the term partnership refers to four different types of partnerships you could form: General Partnerships (GP), Limited Partnerships (LP), Limited Liability Partnerships (LLP), and Limited Liability Limited Partnership (LLLP).
Find part one about sole proprietorships right here.
However, for this article, we will stick with general partnerships. We’ll explore their benefits, drawbacks, and other helpful things to remember if you choose this business structure.
What is a General Partnership?
A general partnership is a business organization controlled by two or more people or legal entities who will work together as co-owners to run the company for profit.
Notably, a general partnership must consist of at least two parties. Although it is not required, it is strongly recommended the individuals in a general partnership prepare a written partnership agreement. This agreement should outline the business structure and each partner’s responsibilities.
As business lawyers, we can’t tell you how many phone calls a day we get from people who have started partnerships and have not created a partnership agreement. Unfortunately, many of these business owners find themselves in a dispute with a business partner that they never saw coming.
Trust us when we tell you to get a partnership agreement if you choose this business structure—it will save you significant problems on the back end.
Read about why you should have a startup lawyer on your team here.
Advantages of a General Partnership
Now let’s focus on why you might opt for this business structure over the others. Weighing the advantages and disadvantages of a business partnership is vital before you go down this path.
1. Shared responsibility
In a general partnership, the owners (partners) share responsibility for the business and its debts and obligations. This can be advantageous because it allows the partners to divide the workload and share the risks and rewards of the company. With this shared responsibility in mind, it’s clear why you’ll want to enter into a GP with people you trust.
2. Tax advantages
The IRS taxes general partnerships as sole proprietorships. This means the partners report business profits and losses on their tax returns.
Partnerships are “pass-through” tax liabilities, meaning taxes are paid by the partners only and not the entity. This can be beneficial because the partners may be able to take advantage of personal tax deductions and credits not available to corporations.
3. Shared knowledge and expertise
By partnering with others, you can bring various skills and expertise that benefit the business. This can be especially useful for starting a business in an unfamiliar industry.
4. Flexibility
A general partnership allows for flexibility in decision-making and management, as the partners can make business decisions together and adapt to changes in the market. GPs are also easy to terminate, and there are minimal formalities (aside from the partnership agreement) in creating the entity.
Ultimately, you get much more flexibility in managing the business than you might with other structures.
5. Lower start-up costs
Finally, a general partnership typically has lower start-up costs than a corporation. No legal fees or charges are associated with setting up a corporate structure.
Overall, a general partnership can be a good choice for those who want to start a small business and share the responsibilities and risks with one or more partners.
Disadvantages of a General Partnership
Like any other business structure, there are also some potential downsides to be aware of. Let’s cover those next.
1. Unlimited liability
There is total legal liability for the business debts and judgments against the business unless it’s an LLP. Each partner is responsible for 100% of the business debts and legal judgments. The name for this is joint and several liability.
As a partner in a general partnership, you have personal liability for all debts and obligations of the business. If the company is sued or incurs debt, your assets, such as your home, savings, and investments, may be at risk.
2. Potential conflicts between partners
In a general partnership, the partners share decision-making and management responsibilities, which can lead to disputes if the partners have different ideas about how to run the business. If the partnership lacks an agreement on managing it, these conflicts can chip away at the business’ stability.
3. Limited lifespan
A general partnership has a limited lifespan, ending when a partner dies or decides to leave the business. This can make it challenging to plan for the business’s long-term future. Also, there are restrictions on transfer and buy/sell provisions limiting partnership interests’ purchase and sale options if one partner wants to leave or others want to come aboard.
4. Difficulty attracting talent
As a general partnership, you may need help to attract talented employees. Often, the business may need more resources or the reputation of a larger corporation.
5. Limited growth potential
A general partnership may have limited growth potential. Typically, the partners are the only source of capital for the business. This can make expanding the business or taking on larger projects difficult.
FAQs About Entering a Business Partnership
You might find the answers below if you still have questions about running a business with one or more partners.
What is a partnership in a business?
General partnerships are a business structure wherein two or more individuals or legal entities collaborate as co-owners to earn profit.
What are the four types of partnership?
The four types of business partnerships are General Partnerships (GP), Limited Partnerships (LP), Limited Liability Partnerships (LLP), and Limited Liability Limited Partnership (LLLP).
What are the advantages and disadvantages of a partnership company?
The advantages of a partnership structure include:
- Shared responsibility
- Tax benefits
- Shared knowledge and expertise
- Flexibility
On the other hand, the disadvantages include:
- Unlimited liability
- Potential conflicts between partners
- Limited lifespan
- Difficulty attracting talent
Remember, if you choose this business structure, creating an agreement with your business partners will save you a lot of hassle (or worse). Contact the team of Denver business lawyers at the Contiguglia Law Firm today so we can help you cover your bases.
Check back soon to read parts three and four of this series.
And remember: My book “Don’t Skip the Legal: The Start-up Guide for Entrepreneurs and Business Owners” covers these and other legal topics relating to business structure and much more in detail. It’s available on Amazon—buy your copy today!
Did you learn a lot about creating a business partnership in this article?
Here are three more articles to read next:
- 9 Reasons Why Buying a Business Vs. Starting a New One is in Your Best Interest
- 6 Business Risks & Mitigation Strategies Every Business Needs to Plan For
- Protect Against 3 Forms of Entrepreneur Liability
