A general partnership (GP) is formed when two individuals have an intent to do business as co-owners (rather than principal/agent relationship e.g. employer/employee). There are no formalities required to form a GP. It is generally the sharing of profits, losses, and control that determine whether or not a general partnership has been formed. However, the presumption of a GP can be rebutted by factors that indicate that a GP was not formed.
General Partnership Liability
Each GP is personally liable for the debts of the partnership and jointly and severally liable for obligations arising due to a contract or a tort. Partners are also vicariously liable for torts committed by each partner and their employees.
Tax Consequences
A GP is taxed similarly to a sole proprietor. The profits and losses are shared based on the agreement (if there is one) or equally and “passed through” to the individual. Thus, a GP is not subject to double taxation like a corporation.
See a CPA/tax consultant to understand how the income from a GP would affect your individual taxes.
Pros
- Easy to Start
- Simply hold yourself out as a partnership
- Low Initial Start-up
- Similar to a sole proprietor you may need a business license and/or a “doing business as” (DBA).
Cons
- Unlimited Liability
- A partner is personally liable for the debts, contracts, and torts of the partnership and any employees’ actions done while in the scope of employment.
- Limited Alienability
- There is no way to transfer an interest in the partnership, thus the partnership dissolves when one party no longer wants to be partners.
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