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The Most Comprehensive Guide To General Partnerships

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LLC stands for “limited liability company,” is a type of business that acts like a corporation at the state level but doesn’t have to pay corporate taxes. According to the IRS, as a  LLC, your business can pay income tax like a partnership or sole proprietorship.

Here, we’ll explain what a general partnership is, if it’s right for your business, and how to set one up correctly.

what is an “all-purpose partnership”?

A general partnership is an unincorporated business run by two or more people, sharing control and debt responsibility. It’s a quick and easy way for partners to start a business together, often without formal paperwork. Common examples include 

  • local laundrettes and,
  • small businesses with friends. 

Be aware of potential partnerships.

A general partnership is a business that isn’t incorporated and is run by two or more people. Each partner has the same amount of control over the business and responsibility for its debts.

People use this business structure because it’s the quickest and easiest way for two or more people to enter business together.

The laundrette down the street from your apartment is most likely a general partnership. The house-painting business you started with a friend while you were in college was also one. Even though you didn’t file any paperwork or say it was a general partnership, it’s likely, a general partnership

You might already be in a general partnership and not even know it.

what is liability?

A liability is a legal obligation or debt that an individual or business owes to others. It represents a responsibility to settle financial or legal claims, which may arise from loans, contracts, or damages.

In a general partnership, liability is a key concern as each partner is responsible for the business debts. Unlike sole proprietorships, multiple people share liability, and one partner’s actions affect others. Business with friends or family requires caution and formal agreements to avoid disputes.

Most of the risks of starting a general partnership come down to liability, which lawyers call each partner’s responsibility for the business’s debts.

For example, if you start a business as a sole proprietorship, you’re only responsible for your own debts.

In a general partnership, more than one person is responsible for the liability. This means that you are responsible for someone else’s personal liability. If they make a mistake, it will directly affect you.

People often go into business with close friends or family members, and they’ll inevitably fight. So it’s clear that you don’t want to rush through or finish with a handshake.

helpful resource: annual budgeting guide for startups

how do I start a general partnership?

Start a general partnership without formal paperwork, but consider filing with your state. A verbal agreement is enough, but a written partnership agreement helps avoid legal disputes and ensures clarity in terms. Here are the things that a legal written agrement must have!

You don’t have to file any forms with your state to start a partnership, but it’s a good idea to do so. Most states only require a verbal agreement and a handshake to start a business.

But if there’s ever a legal dispute between you and the other business owners, not having the terms of your agreement in writing could get you in trouble. This is why it’s always best to write up a partnership agreement.

sign a written agreement to work together.

Small businesses often just “wing it” and go by what they say. You’re going into business with someone you trust, so what could possibly go wrong?

The correct answer is “a lot.” Everything must be written down, no matter how much you trust your business partner. And to do that, you need to sign a written agreement.

a partnership agreement is similar to a company’s bylaws. at the very least, it should show four things:

  1. The name of the partnership. 
  2. How will the partnership’s profits be split? 
  3. How can the partnership’s losses be split?
  4. What happens when someone wants to sell their share or get rid of it?

an exhaustive, well-written partnership agreement also covers the following:

  1. The type of business you have
  2. How long will the relationship last? (if it has an expiry date)
  3. What types of partners will be in it (more on that below)
  4. How much money, time, and other resources is each partner expected to put in
  5. Rules for what to do when it’s time to end the business relationship
  6. How to settle differences of opinion

No matter how tempting it might be, only sign a partnership agreement after having a lawyer look it over.

A lawyer can help you make a partnership agreement that fits the needs of your business, foresees any problems your business might face in the future, and saves you a lot of trouble if you or one of your partners ever decide to sue each other.

what sets general partnerships apart from other types of business entities?

General partnerships differ from limited partnerships, limited liability partnerships, and corporations, as the latter three can have multiple partners but have specific legal structures and liability protections. Let us see these with examples:

General partnerships are different from limited partnerships, limited liability partnerships, and corporations, which are the other three types of business entities that can have more than one partner.

limited partnerships

Limited partnerships involve at least one “limited partner” with no responsibility for the debts or decision-making. Often “silent partners,” they provide capital without involvement in day-to-day operations, limiting their responsibility to the initial investment.

At least one partner in a limited partnership is a “limited partner.” A limited partner isn’t responsible for the partnership’s debts and has no say in how the business is run or what decisions are made.

Limited partners, sometimes called “silent partners,” usually only give money to a business and don’t get involved in its day-to-day operations. Their responsibility is limited to the amount they put in at the beginning.

For instance, as a limited partner, you put $2,000 into your friend’s startup. If your friend ever goes bankrupt, the only thing creditors can come after is that $2,000 equity stake you have in the business. The rest of your property is safe.

limited liability

Limited liability partnerships (LLPs) have at least one limited liability partner, who is similar to a limited partner but also helps run the business daily. In this way, they’re like people who belong to a limited liability company (LLC).


You can also start a business with more than one person by making it a corporation. No one is responsible for the debts of a corporation.

you may also read: cost-effective accounting solutions for startups

reasons to form a general partnership

There are some main reasons why people form general partnerships:

  • It’s easy to make them.

As we’ve already said, you only need a simple verbal agreement to form a general partnership. Creating a general partnership is cheap, quick, and easy compared to forming a LLC or a LLP.

  • you are responsible for paying off someone else’s debts.
    General partners and partnerships bear greater liability than other entities. Even if not responsible for debts, creditors can pursue partners for the full amount.

General partners and general partnerships are more liable than any other partner or business entity, even more than sole proprietors. If one of your partners makes a mistake and gets the business into debt, their creditors can come after you for the total amount, even if you had nothing to do with getting into debt in the first place.

  • you will also be responsible for any other mistakes they make.

As a general partner, you’re liable for errors made by partners or employees. General liability insurance helps mitigate but not eliminate risks.

If you are a general partner, you could also be responsible for any mistakes or carelessness that your partners or employees make at work. You can protect yourself from some of this risk by buying general liability insurance, but you can never get rid of it completely.

The guide to general partnerships equips individuals with valuable insights into liability, formation, and management. Careful planning and agreements are vital to mitigate risks effectively.

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