# General Partnerships Explained: Definition, Features, and Key Examples

![General Partnership](https://www.investopedia.com/thmb/wGbfzy0piWTv-7CMSIAlGN-YWgI=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/Generalpartnership_final_rev-8eda351ea7424cb4bd6a885f2bcaa040.png)

*— Investopedia / Michela Buttignol*

> **Definition**
>
> A general partnership is a business arrangement where two or more individuals share responsibilities, profits, and liabilities.

## What Is a General Partnership?

A general partnership is a business arrangement by which two or more individuals agree to share responsibilities, assets, profits, and financial and legal liabilities associated with a jointly-owned business. They are less expensive to form than a corporation. Each partner's financial involvement directly affects their personal liabilities and tax responsibilities. Importantly, partners assume [unlimited liability](https://www.investopedia.com/terms/u/unlimited-liability.asp), potentially subjecting their personal assets to seizure if the partnership becomes insolvent. General partnerships are [pass-through entities](https://www.investopedia.com/terms/f/flow-through.asp) by which profits or losses are passed directly to partners, who report them on their personal tax returns. The partnership itself isn't taxed.

### Key Takeaways

*   A general partnership involves two or more partners sharing business responsibilities, profits, and unlimited liability for debts.
*   Unlike corporations, general partnerships don't require state registration and offer more flexible business structures.
*   Partners report their share of profits or losses on personal tax returns, as the partnership itself isn't taxed.
*   General partnerships must have written partnership agreements to outline management, profit sharing, and dispute resolutions.
*   Known for simplicity and low cost, general partnerships are popular in professional services like law and medical practices.

## How General Partnerships Work

General partnerships are unincorporated businesses. Those who form a general partnership don’t need to register their business with a state to function legally.

General partnerships offer the flexibility to structure businesses however partners see fit. This gives those partners the ability to control operations more closely.

In turn, this allows for more swift and decisive management action compared to corporations, which must often deal with multiple levels of bureaucracy and red tape, complicating and slowing down the implementation of new ideas.

A general partnership must satisfy the following conditions:

*   It must include a minimum of two people.
*   All partners must agree to be personally liable for any and all liabilities that their partnership may incur.

## Key Elements of a General Partnership

### Partnership Agreement

The partnership should have a formal, written [partnership agreement](https://www.investopedia.com/terms/a/articles-of-partnership.asp), though oral agreements are valid. The partnership agreement details such things as the business's governing structure, the partners' rights and responsibilities, and how profits should be allocated.

It can also state what should happen when a partner leaves, dies, or otherwise becomes unable to function as a partner. For example, the agreement may stipulate that a deceased partner's interest is transferred to the surviving partners or a successor.

### Management

Ideally, the partnership will have created its own agreement that addresses among other things, the topic of management and control.

However, if the partnership has no agreement that sets forth how the partnership should be managed and who should manage it, it can follow the directives in the [Revised Uniform Partnership Act (RUPA)](https://www.investopedia.com/terms/u/uniform-partnership-act-upa.asp), which most states have adopted. The act provides a standard of governance for partnerships. It defines:

*   How a partnership is created
*   The rights and duties of partners
*   Partnership assets and liabilities
*   Fiduciary duties of partners and the partnership
*   Profit allocations and voting rights

### Individual Decision-Making

In a general partnership, each partner has the agency to unilaterally enter into binding agreements and business deals, and all other partners are bound by the terms.

Not surprisingly, such activities may lead to disagreements. As a result, many successful general partnerships build conflict resolution mechanisms into their partnership agreements.

In some cases, the partners agree only to proceed with major decisions if there's either a complete consensus or a majority vote. In other cases, the partners designate non-partner appointees to manage the partnerships, similar to a company's board of directors. In any case, broad agreement is essential because when all partners have unlimited liability, even innocent players can be fiscally on the hook for inappropriate or illegal actions.  

### Compensation

Rather than a salary, partners receive distributions from the partnership’s profits. These distributions should be in accord with the allocation of profits detailed in the partnership agreement. If the partnership has no agreement, profits should be equally distributed according to RUPA (mentioned above).

Money that the partnership does not distribute to partners can be used for other purposes (e.g., reinvested in the business).

### Joint Liability

Partners in a general partnership have shared liability for the debts and obligations of the business. Every partner agrees to unlimited personal liability for their actions, the actions of all other partners, and those of any and all employees.

Therefore, partners have shared responsibility—also known as [joint liability](https://www.investopedia.com/terms/j/joint_liability.asp)—for damages awarded in a legal action taken against the partnership.

Joint and severe liability, where someone can sue any partner for actions taken by others, is also a possibility in certain states. Partners must then decide how much each owes.  

### Fiduciary Duties

Partners have a fiduciary duty to act in the best interest of their partnership. In fact, specific fiduciary duties are key to protecting partners and the business itself. A partner who breaches a fiduciary duty may be personally liable for any harm that breach causes the partnership.

While the partnership, in its agreement, can assert additional fiduciary duties, the main ones are:

**Duty of Good Faith and Fair Dealing**

Partners need to be honest and fair in all partnership dealings.

**Duty of Loyalty**

Partners should avoid personal activities that could harm the partnership and must place its interests above their own.

**Duty of Care**

Partners should manage partnership affairs wisely. If they act carefully and in good faith, they aren't liable for negative outcomes.

**Duty of Disclosure**

Partners must share any business risks or relevant information and disclose conflicts of interest.

### Taxes

General partnerships don't pay business income taxes. Instead, they pass income and losses to partners, who then report these on personal tax returns.

Partners must pay taxes on any undistributed partnership earnings, known as [retained earnings](https://www.investopedia.com/terms/r/retainedearnings.asp).

A general partnership must complete and provide IRS Form [Schedule K-1](https://www.investopedia.com/ask/answers/09/k-1-tax-form.asp) to each partner by March 15. A K-1 details each partner's share of business income, losses, credits and deductions. Each partner uses the information within the K-1 to complete their personal tax return. The K-1 does not need to be sent with the tax return to the IRS.

However, because partnership earnings are considered self-employment income, partners will need to include a Schedule SE with their tax return. It is the form used to determine the tax due on net earnings from self-employment. Information on Schedule SE is also used by the [Social Security Administration (SSA)](https://www.investopedia.com/terms/s/ssa.asp) to figure your Social Security and Medicare benefits.

The partnership must file Form 1065 with the IRS by April 15. This form is informational and requires no payments.

## Real-World Examples of General Partnerships

Many individuals and service providers choose general partnerships because they are simple, low cost, and easy to set up.

Law firms, medical offices, and architectural firms often form general partnerships. Families looking to run a business together do the same.  

## Pros and Cons of General Partnerships

### Advantages

1.  A general partnership is less expensive and easier to set up than a corporation or [limited liability partnership (LLP)](https://www.investopedia.com/articles/investing/090214/limited-liability-partnership-llp-basics.asp).
2.  Less paperwork is involved. In the United States, filing partnership paperwork with a state is generally not required, though certain registration forms, permits, and licenses may be necessary at the local level.
3.  As a pass-through entity, the partnership pays no taxes.
4.  No external financial reporting/annual report is required.
5.  Dissolving a general partnership is straightforward.

### Disadvantages

1.  Personal liability is unlimited. A partner's personal property can be seized to pay partnership debts.
2.  With shared liability, partners must deal with the financial and legal consequences of each other's (and employees') actions.
3.  Disputes may be difficult to address and disastrous for the business (unless properly planned for in the partnership agreement).
4.  Over time, a business can become complicated, encounter greater risks, increase potential personal liability, and outgrow the general partnership structure.

## Is a General Partnership the Same As an LLP?

Not exactly. A general partnership and a limited liability partnership are both partnerships and pass-through entities. However, a general partnership involves the potential for the unlimited personal liability of partners for financial and legal obligations. A limited liability partnership (like a limited liability company) limits liability to just what the partner has invested in the business. Their personal assets are protected from seizure.

## What Are the Advantages of a General Partnership?

General partnerships can be simple to set up. People can get together, declare that they're a partnership, and start working immediately. In most cases, a general partnership isn't required to register with the state it does business in. Incorporation isn't required, either. It can be dissolved automatically when one partner leaves. And it doesn't pay taxes (though the partners do).

## Who Owns a General Partnership?

The partners own the partnership. Ideally, the partnership will create a partnership agreement that, among other things, states who the partners (owners) are as well as the profit allocation percentage for each.

## The Bottom Line

A general partnership is a business with at least two owners, or partners, who agree to share the responsibilities involved in running the business. A partner has unlimited personal liability for any and all debts and obligations of the company. Each partner reports their share of business profits and losses on their individual tax return and pays any taxes due. The partnership itself isn't subject to taxation.

A general partnership is a common type of business due to the fact that it's easy to set up and dissolve. However, it may need to restructure at some point as it grows and encounters greater business risk so as to limit the exposure to personal financial liability that partners have. Importantly, a partnership agreement is crucial to defining profit allocation, management processes, and liability sharing among partners.

> **Article Sources**
>
> 1.  U.S. Small Business Administration. "[Choose a Business Structure](https://www.sba.gov/business-guide/launch-your-business/choose-business-structure)."
>     
> 2.  National Conference of Commissioners on Uniform State Laws. "[Uniform Partnership Act (1997)](http://www.federal-litigation.com/_01%20Hamed%20Docket%20Entries/RUPA%20Text.pdf)."
>     
> 3.  Cornell Law School, Legal Information Institute. "[General Partner](https://www.law.cornell.edu/wex/general_partner)."
>     
> 4.  National Conference of Commissioners on Uniform State Laws. "[Uniform Partnership Act (1997)](http://www.federal-litigation.com/_01%20Hamed%20Docket%20Entries/RUPA%20Text.pdf)." Pages 2, 18, 66-67.
>     
> 5.  Cornell Law School, Legal Information Institute. "[Fiduciary Duty](https://www.law.cornell.edu/wex/fiduciary_duty)."
>     
> 6.  Internal Revenue Service. "[Tax Information for Partnerships](https://www.irs.gov/businesses/partnerships)."
>     
> 7.  Internal Revenue Service. "[Publication 509, Tax Calendars](https://www.irs.gov/pub/irs-pdf/p509.pdf)." Page 4.
>     
> 8.  Internal Revenue Service. "[Instructions for Form 1065, U.S. Return of Partnership Income](https://www.irs.gov/pub/irs-pdf/i1065.pdf)." Pages 3, 31.
>     
> 9.  Internal Revenue Service. "[About Schedule SE (Form 1040), Self-Employment Tax](https://www.irs.gov/forms-pubs/about-schedule-se-form-1040)."
>     
> 10.  Internal Revenue Service. "[Instructions for Form 1065, U.S. Return of Partnership Income](https://www.irs.gov/pub/irs-pdf/i1065.pdf)." Pages 3, 6.
>      
> 11.  U.S. Small Business Administration. "[Apply for Licenses and Permits](https://www.sba.gov/business-guide/launch-your-business/apply-licenses-permits)."
>      
> 12.  U.S. Small Business Administration. "[Register Your Business](https://www.sba.gov/business-guide/launch-your-business/register-your-business)."
>      
> 13.  Wolters Kluwer. "[What Is an Annual Report: Definitions & Filing Requirements](https://www.wolterskluwer.com/en/expert-insights/annual-report-filing-requirements)."