By Garrett Sutton, Esq.
If you thought sole proprietorships were bad, just wait. The general partnership really is the ugliest entity.
Unlike a sole proprietorship, a general partnership requires two owners, or partners. Unfortunately, like a sole proprietorship, a general partnership, offers no asset protection. Again, there is no charter from the state, no legal separateness and, accordingly, no protection.
In a general partnership not only are you personally responsible for your own mistakes as in a sole proprietorship, but you are also personally responsible for your partner’s mistakes. It is liability times two.
A partnership can be formed with a simple handshake between two or more people who agree to work together. You don’t need a partnership agreement or any sort of written document. Such a loose agreement also leaves no paper trail for the partners to go back to when things go south. When partners become adversaries and there’s no written partnership agreement in place, the laws of the state in which the partnership was formed take precedence, and the partners are left without any choice in the matter. Similarly, if one partner leaves, dies or goes bankrupt, the partnership is terminated and the partners are liable for the company’s debts and obligations.
I will not set up a general partnership, ever. Not only is there too much liability but it requires a great deal of document drafting. A general partnership agreement includes, at minimum:
- Type of business
- Finance requirements (the amount each partner is expected to contribute to finance the company up front)
- Rights and duties (what is expected of each partner)
- Dispute resolution procedures
- Compensation (the method of sharing profits and losses)
- System authorizing cash withdrawals and salaries
- Termination procedures (how the partnership will be dissolved if it becomes necessary)
For all the time and energy it takes to set up an ugly entity, you might as well set up a good one. Sign up for a free 15-minute consultation to talk with an incorporation expert, or learn more about corporate entities here.
The above is an excerpt from my book Run Your Own Corporation.