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How Does a General Partnership Work?

For those who do not want to start a new business on their own, there are different types of partnerships to consider. Perhaps the simplest and easiest is called a general partnership.

Unlike other forms of business organization, such as a corporation, there are no required formalities for forming a general partnership. Nor must the partners create a written partnership agreement, though it is often a good idea. Legally, a general partnership exists when two or more people are carrying on as co-owners of a business and sharing the profits. They are not allowed to draw a salary on top of the profits, which must be shared equally, along with the losses.

Starting a general partnership automatically creates duties that the partners owe each other. They each have a duty of loyalty, which means no partner may enrich him- or herself at the expense of the partnership, such as by buying supplies at an inflated price in exchange for a secret kickback from the supplier. A partner who simply makes a bad deal without any personal enrichment has not violated this duty. Partners also take on a duty to provide financial accounting to the rest of the partners.

If the partners wish to add other duties, they must include them in a written agreement. The agreement can detail how much each control each partner has over operations, how major decisions will be made, and so on.

Just as profits flow directly to the partners, in a general partnership the business’ taxes get paid through the partners’ personal income tax filings. Whether this is a burden you and your partners wish to take on is an important consideration when starting your business.

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