A general partnership is a relationship existing between two or more persons who join together to carry on a trade or business. Each partner contributes money, property, labor, or skill to the partnership and in return, expects to share in the profits or losses of the business. By combining the credit potential of the various partners, a partnership has greater opportunity for business credit than is generally available to a sole proprietorship. In addition, the assets that are placed in the name of the partnership may often be used directly as collateral for business loans. The pooling of the personal capital of the partners generally provides the partnership with an advantage over the sole-proprietorship in the area of cash availability. A partnership is usually based on a partnership agreement of some type, although the agreement need not be a formal document. It may even simply be an oral understanding between the partners, although this is not recommended.
However, please note that there are two classes of partnerships - general partnerships and limited partnerships. In a general partnership, all partners are equal. Each partner has equal power to incur obligations on behalf of the partnership and each partner has unlimited liability for its debts. As a result, each partner is subject to unlimited personal liability for the debts of the partnership. The potential liability in a general partnership is even greater than that encountered in a sole proprietorship. This is due to the fact that in a general partnership, the personal risk for which one may be liable is partially out of one's direct control and may be accrued due to actions on the part of another person. Each partner is liable for all of the debts of the general partnership, regardless of which of the partners may have been responsible for their accumulation. Furthermore, there is also the potential for personal legal liability for the negligence of another partner as well. In fact, each partner may even be liable for the negligence of an employee of the general partnership if such negligence takes place during the usual course of business of the partnership. For example, if two doctors form a general partnership and one signs a lease to move the office to a location that has a higher rent, without the consent of the other partner, the other partner is still bound by the lease and will incur any costs of the move. More significantly however, if a malpractice lawsuit is filed against one of the physicians, then the other partner may also suffer losses due to the lawsuit. Since they formed a general partnership, both of them will suffer in the losses jointly and essentially are jointly liable, unlike in a limited partnership where severed liability exists. Of course, general liability insurance can counteract this drawback to some extent to protect the personal and partnership assets of each partner. As a result, we generally do not recommend general partnerships to our clients unless it is for a real estate venture or with close, trusted family members.
Furthermore, as with the sole proprietorship, there may be certain tax advantages to the operation of a business as a general partnership, as opposed to a corporation. The profits generated by a partnership may "pass through" directly to the partners without incurring any "double" tax liability, as is the case with the distribution of corporate profits in the form of dividends to the shareholders. Income from a partnership is taxed at personal income tax rates. Note, however, that depending on the individual tax situation of each partner, this aspect could prove to be a disadvantage.
Finally, for a business in which two or more people desire to share in the work and in the profits, a partnership is often the structure chosen. It is, potentially, a much simpler form of business organization than the corporate form. Less start-up funding is necessary and there is limited regulation of partnerships.
Although it may be advantageous to form a partnership in some instances, there are several inherent disadvantages beyond the joint liability discussed above. One disadvantage to a partnership is the potential for conflict between the partners. Of all forms of business organization, the partnership has spawned more disagreements than any other. This is generally traceable to the lack of a decisive initial partnership agreement that clearly outlines the rights and duties of the partners. This disadvantage can be partially overcome with a comprehensive partnership agreement. For example, if there was no initial agreement made about what types of patients two physicians want to treat, one may disagree with the other later on over who should be treated and who should not. Furthermore, the partnership lacks the advantage of continuity. A partnership is usually automatically terminated upon the death of any partner. A final accounting and a division of assets and liabilities is generally necessary in such an instance unless specific methods under which the partnership may be continued have been outlined in the partnership agreement.
Many examples of partnerships exist. Many lawyers, physicians and real estate associates form partnerships for the many benefits they provide. For example, in the case of a group of physicians, forming a partnership is beneficial since it makes raising capital much easier. However, there is much liability involved and all partners will suffer if there is a malpractice lawsuit brought upon one of the partners.
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