Your Guide to Business Entity Types: General Partnerships
A general partnership is a common business entity type that occurs when two or more people own a business and have not filed to register the company as any other type of entity such as a limited liability company or corporation.
Today, as a part of our Your Guide to Business Entity Types blog series, we are going to delve into general partnerships. What makes a general partnership? How are they taxed? How does personal liability work in a general partnership? You’ll find answers to these questions and more. Continue reading, and if you have any additional inquiries, or are in need of an experienced business attorney, reach out to the team at Morris Law Group today.
What Is a General Partnership?
A general partnership (GP) is a business structure in which the company is run for-profit with two or more owners who have not filed paperwork with the appropriate state agency to operate the business in another legal form. It is the default organization of a multi-owner, for-profit business.
A general partnership is governed by the laws of the state in which it operates. Every state has its own laws governing a GP, often based on the Revised Uniform Partnership Act (RUPA). The statutes govern the relationship between the partners and the partnership.
The Partnership Agreement
A GP typically has a written partnership agreement (PA), signed by each partner, that governs the management structure, division of profits and losses, taxation, admission and withdrawal of partners, and the dissolution. A PA allows partners to adjust the rules of the organization to best fit the needs of the organization. A PA allows for, by default, the equal distribution of profits and losses, or for the profits and losses to be allocated in accordance with the capital contributions of each partner.
Management Structure
The management structure of a general partnership is up to the partners and specified in the PA. The partners may select a managing partner, in whom is vested the authority to make all decisions for the organization. A management committee may be composed of the partners with the authority to make all decisions. The PA will dictate whether all partners get an equal vote in managing the business, or whether each partner only has the voting power in accord with that partner’s capital contribution to the organization. If the PA is silent on the matter of voting rights, it implies that each partner has equal voting power. Whether a managing partner or committee is chosen, the PA will likely require a vote by all partners for matters outside the scope of ordinary business.
Liability
A significant downside of a general partnership is that each partner is personally liable, jointly and severally, for the obligations of the GP. If a GP fails and defaults on any loans, each of the partners are liable personally for the entire amount of the loan. Additionally, if one partner injures another person in the performance of partnership business due to negligence or misconduct, each of the other partners are liable to the injured party.
Taxes
As for taxation of a general partnership, it is usually taxed under subchapter K of the Internal Revenue Code and consists of provisions designed for the taxation of a business organized as a partnership. Under this subchapter, a general partnership is not required to pay federal income tax, but allocates its profits or losses to the partners as assigned by the PA, and is then reported on the partners’ personal federal income tax return.
Learn More About General Partnerships
Are you interested in starting a general partnership? Or, are you already an owner of a GP and require legal counsel or representation? The Edina business lawyers at Morris Law Group can help. Our team is highly experienced in matters of business law with small businesses, restaurants, startups, real estate firms, and more. No matter your needs, our Minnisota business lawyers can provide you with the legal representation and counsel you need. Reach out to our law firm today to schedule your free, no-obligation consultation. Serving the Minneapolis, Saint Paul and Western Wisconsin, Twin Cities Minnesota metro area.