General Partnerships

One of the most important decisions a new business owner makes is deciding the business structure. General partnerships are unique amongst the various business structures due to one basic fact: a partnership is the base level organization and can be formed in Georgia without actively choosing to create a partnership.

How is that possible?

At the most basic level, a general partnership (also known as a partnership) is an association of two or more people who come together as co-owners of a business for profit. When this situation occurs – voila – you have a partnership under Georgia law!

While it may seem unfair to force individuals into a corporate structure they may not have intended to form, the law’s reasoning is sound and actually helps those who may just be starting out in business.

This is because forming a partnership, even if unintentionally, provides each partner with rights and duties governed by Georgia’s Uniform Partnership Act. The rights and duties under this Act provide a baseline for the business.

Founders can adjust these rules by creating a Partnership Agreement between all members of the partnership.

A partnership agreement allows the founders to describe and document the entire relationship between the parties. This includes things like whether partners get salaries from the partnership, the rights and duties of each partner, how partners share in the profits, losses, and cash flows of the business, and the transferability of each partner’s interest in the organization.

Advantages of forming a general partnership

Similar to an S corporation, partnerships are treated as a pass-through entity for income tax purposes. This means that partners pay for the entity’s income taxes (rather than the business), and the partners can deduct partnership losses on their personal tax returns.

Another advantage of partnerships is the simplicity. They do not have to file with their Secretary of State. There are typically no filing requirements or costs associated with forming a partnership. Additionally, there are typically no formal operational requirements that demand any sort of compliance reports.

Disadvantages of forming a general partnership

While there are many benefits to forming a general partnership, there are also some significant shortcomings. First, the pass-through taxation structure can create liquidity problems for the partners.

Second, all the partners have unlimited joint and several liability for the actions of the partnership. This means that if the partnership is sued, a litigant can come after the partners’ personal assets, not just the business assets.

Third, each partner can bind the general partnership in all business matters because of the inherent agency relationship between each partner and the business. This means that a rogue or simply confused partner can bind the company to a contract that the other partners did not agree to.

Fourth, and finally, depending on the terms Partnership Agreement, a partner’s interest in the company can be either easily transferable (meaning outsider can be made an equal member of the firm) or not easily transferable (leading to possible liquidity issues).

Is a General Partnership right for your business?

One of the most important decisions a new business owner makes is deciding the business structure.