General partnerships are the most basic type of partnership, and are little more than an agreement between two or more people to run a business. General partnerships have fallen out of favor, being replaced by other types of business structures because they don’t offer liability protection for their owners. Despite this, there are some advantages to starting a general partnership.
Advantages of General Partnerships
Compared to a sole proprietorship. The main advantage a general partnership has over a sole proprietorship is that you will have the availability of the assistance of your partner or partners. Partners can assist you with such things as money, expertise, and the workload. For some people, being in business alone can be lonely and hard on the nerves. It can be nice to have someone to share the responsibilities and decision-making.
Compared to a limited partnership. The primary advantage a general partnership has over a limited partnership is that a general partnership is usually more simple. The partnership agreement is less complicated and limited partnerships often require more government regulation. Limited partnerships are generally required to:
- register with a state agency;
- pay an annual registration fee;
- have more complex tax requirements; and
- may also come under federal and state securities regulations.
Compared to a corporation. The main advantage a partnership has over a corporation is in the areas of taxes and government intervention. A corporation must pay taxes on its profit. If any of that profit is then paid to stockholders as dividends, the stockholders then pay tax on the amount they receive. In such a case the profit of the corporation is taxed twice. (For small corporations, there is a way to get around this double taxation as far as the federal tax is concerned.) Additionally, in some states with no personal income tax, there is still an income tax on corporations.
Also, in order to incorporate, you must file an application with the state government. This application must generally be renewed each year. This can be expensive, as most states charge a fee for applications and annual renewals.
Compared to a limited liability company. As with the limited partnership and the corporation, the limited liability company is also more complex. Registration, along with an annual fee that may be higher than for a corporation, is typically required. Also, state corporate income taxes may need to be paid.
Disadvantages of General Partnerships
Compared to a sole proprietorship. An advantage of a partnership over a sole proprietorship can also be a disadvantage. That partner who was initially nice to have around to help make decisions can quickly turn into someone to argue with over how the business should be run. In a partnership, you do not always get your way. Bur in a sole proprietorship, you get to make all of the decisions. Only you are responsible for success or failure.
Compared to other forms of business. The main disadvantage of a general partnership in comparison to a limited partnership, corporation or limited liability company is the unlimited liability of the general partners. In a regular general partnership, each partner is personally liable for the debts of the partnership. If your partner runs up a lot of debts for the business, or if the business loses a lawsuit, the creditors can come after your personal belongings to get paid (such as your personal bank accounts, car, boat, etc.). However, if your business is a corporation or limited liability company, the creditors can only come after money and property belonging to the business.
Similarly, if you are a limited partner in a limited partnership, creditors can only come after property of the business or the general partners. Your personal property is safe in such circumstances.
The idea of the business entities with limited liability of the owners came about as a way for the government to encourage people to start businesses to boost the economy. It is a way to go into business without risking everything you own.
Another possible advantage to other forms of doing business is in the area of taxes. Determining which type of business entity provides the best tax situation will depend upon many variables of the particular business in which you are involved. This can best be determined by a CPA or tax attorney.