A General Partnership (GP) is an agreement between partners to establish and run a business together. It is one of the most common legal entities to form a business. All partners in a general partnership are responsible for the business and are subject to unlimited liability for business debts.
What is a General Partner?
A general partner is a member or partner in a general or limited partnership with unlimited personal liability for the debts of the business. A general partner actively manages and exercises control over the company.
Example of a General Partnership
For example, let’s say that Fred and Melissa decide to open a baking store. The store is named F&M Bakery. By opening a store together, Fred and Melissa are both general partners in the business, F&M Bakery.
It is important to note that each general partner must be involved in the business. For example, Fred may take care of logistics and purchasing orders while Melissa oversees the store operations.
The income generated by the business is split between Fred and Melissa. At the same time, Fred and Melissa are equally responsible for any losses incurred by the store.
Advantages of a General Partnership
There are several key advantages to forming a GP:
1. A general partnership is easy to establish
Creating a general partnership is simpler, cheaper, and requires less paperwork than forming a corporation.
2. A general partnership faces simplified taxes
General partnerships do not pay income tax. All profits and losses are passed through to the individual partners.
3. The partnership is easy to dissolve
A partnership can easily be dissolved at any time.
Disadvantages of a General Partnership
There are two key disadvantages to forming a GP:
1. Partners face potentially unlimited liability
Due to the lack of corporate structure, a general partnership does not establish itself as a business entity separate from the partners. Partners are unprotected from any lawsuits against the business and their personal assets can be seized to cover unmet debt obligations of the business.
2. Partners are liable for each other’s actions
Each partner is liable for the actions of the others. If one partner executes an agreement without the knowledge of the other partners, the other partners are still obligated to honor the terms of that agreement.
Other Types of Partnerships
In addition to a GP, there are two other common types of partnerships:
1. Limited partnership (LP)
In a limited partnership, at least one partner possesses unlimited liability (the general partner) while the other partners are subject to limited liability (limited partners). Limited partners are not involved in the active management of the business and cannot lose more than the money that they have contributed to the partnership.
2. Limited liability partnership (LLP)
In a limited liability partnership, there is no general partner. All partners are allowed to be involved in the management of the company and all partners enjoy limited liabilities. Limited liability partnerships are preferred by professional service businesses because the partners in an LLP are not liable for negligence claims made against themselves or other partners.
We hope you enjoyed reading CFI’s explanation of a Partnership. To further enhance your financial literacy, the following free CFI resources will be helpful: