A general partnership consists of two or more individuals who share the management of an entity and are personally responsible for the obligations of the business. The simplest way to organize your business if you have more than one person involved in the management is to become a partnership. Partnerships are relatively flexible in that they allow the business to operate in a way that best suits business needs, because other partners can make up for what one partner may lack with their individual contributions. Altogether the partnership is more powerful than the sole proprietorship. A partner can be any kind of entity, from an individual, to a partnership, to a limited liability company, to a corporation or even a trust. Partners share assets, profits, and liabilities as well as management responsibilities.
Because all of the partners are legally intertwined, it is important to take protective measures like buy/sell agreements or key man life insurance policies. If a partner withdraws or dies, what will happen to the partnership? Have plans in place before certain foreseeable events might occur.
Buy/sell agreements specify how the value of a partner’s interest will be determined if one of the partners decides to bow out of the partnership; these agreements can reduce disputes at sensitive times, and can smooth out the transition when a partner withdraws. Key man life insurance provides cash in the event of the death of a key member, which means the benefits can be used to keep the business going during the transitional period. The money from the insurance policy can also be used to buy out the deceased partner’s share in the business.
Characteristics
Partners are liable for the obligations of a partnership, as with a sole proprietorship, and each individual partner can be help responsible for all obligations of the business. Even though the risk is spread equally, the partner who does pay the entire obligation has the right to collect from the other partners. The truth is, not all those partners will be in the position to repay that debt. This is called being held jointly and severally liable for debts.
Any one partner, called an agent of the partnership, can enter into a contract binding all other partners on behalf of the partnership.
Profits and losses are shared equally amongst partners, unless stated otherwise in the partnership agreement.
General partnerships are taxes like sole proprietorships; every partner reports business income on his or her personal income tax return.
Advantages
Partnerships are easy to form and can have more than one owner.
Having a partnership organization can be beneficial in many different ways throughout the lifetime of the business. New partners can be admitted as the business grows.
There is a shared financial commitment to the business through the various partners, as well as shared resources, experience, knowledge, and talent.
Disadvantages
Partners are jointly and severally liable for the business’ debts and liabilities
One partner can act on behalf of all partners, and all partners are liable for debts and decisions of other partners.
It can be difficult to attract investors.
Partnerships are vulnerable to dissolution if one of the partners dies or withdraws unless there is a buy/sell agreement in place.
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