Going into business is rife with legal risks, which is why business formation attorneys are so invaluable. When considering forming a general partnership, you should know what you’re getting into, and what the possible pitfalls may be.
What is a General Partnership?
A general partnership consists of two or more people who go into business together for profit. It is a step up from a sole proprietorship in that all the members of the partnership divide the liabilities of the business amongst themselves instead of just one person. You don’t actually have to go through any formal process to establish a partnership; the entity is created by the act of engaging with one or more other persons in a business enterprise.
Rules of a General Partnership
Under the Uniform Partnership Act, the rules of partnership include but not limited to the following:
- Joint property ownership or tenancy does not establish a partnership.
- Income or profit from property held jointly does not constitute a partnership.
- Profit sharing from a business constitutes a partnership except when the share was received as payment for rent, debt or wages.
- If a person allows the use of his or her name to benefit the business in any way, that person is considered a partner, and may be held equally liable as the formal members of a partnership.
- Profits are reported as personal income and taxed accordingly. This is called a pass-through. The portion of the income that are reported under each partner is based on the profit-sharing terms of the partnership agreement.
- Each partner is personally liable for the partnership’s obligations. This may take the form or joint or several liability. Even if only one partner is found guilty of any wrongdoing concerning the business, all partners are jointly and/or severally liable. In some instances, the same would apply for liabilities of the partnership’s employees.
- Each partner has equal voting rights unless otherwise stipulated.
Because a partnership is subject to a lot of issues and disputes, including complicated taxation laws, it is advisable to have a written agreement drawn up prior to the commencement of any business endeavor. Contacting business formation attorneys to draw up a partnership agreement ensures that each partner’s rights and concerns are addressed legally and fairly.