To fully understand partnerships, as well as all other types of business entities, it is important to understand the legal concept of personal liability for business obligations.
There are always financial risks associated with starting a business. One risk is that the business will fail to make money, and owners will lose the money they put into the business. A potentially more significant risk is that you will lose more than your investment.
If you borrowed money to start and run your business, and can’t repay it, the lender may file a lawsuit. Your business could also get sued for things like breach of contract (like not paying your vendors), personal injuries (if one of your customers slips and falls in your store or your delivery truck is involved in an accident), illegal discrimination or even for things like fraud.
These creditors may come after your personal assets, such as your personal bank and investment accounts, your house, your car, your boat, your vacation home, etc. It doesn’t necessarily take a valid lawsuit to bankrupt a business and its owners, even an unfounded lawsuit can be costly to defend.
To make entrepreneurship appealing, states have created various types of business entities which limit the personal liability of business owners. So for certain types of business entities, only the assets owned by the business itself may be subject to the claims of creditors. The business owner’s personal assets are protected from business creditors.
It can not be overstated what a potentially dangerous situation unlimited liability is for business owners. If your business faces a lawsuit, unpaid debts, or even failed obligations to business partners (such as a delayed shipment), you could lose your personal savings, home, and even retirement to pay off these debts. For this reason, the general partnership has fallen out of favor with business owners.