General Partnership Laws

A general partnership is the most common and basic type of partnership.

A general partnership is a type of business entity. It is naturally formed whenever two or more individuals create a business. Other forms of business are available to people who want to share in the creation of a company, but those must be specifically selected and must be registered with the state (for example, a corporation or a limited liability company (LLC)). A general partnership is formed by default when no other choice is explicitly made.

In a general partnership, each partner is held responsible for the profits, losses, and liabilities of the company. If the business violates any laws, the partners are responsible for that as well.

In deciding whether a partnership has been formed, it is not relevant whether or not the individuals were attempting to create one or not. The only important factor is whether the parties intend to proceed as co-owners of a business for profit. Two factors can be examined to determine this: whether the partners will share in the profits and whether they have the right to control the business.

For example, suppose two people open a car dealership. They make joint decisions about the dealership, and they split the profits. Even if they do not refer to themselves as partners, their business relationship meets the definition of a partnership.

There are two basic types of partnerships: a general partnership and a limited partnership. There are several differences:

• In a general partnership, every partner fulfills both the roles of business manager and investor. In a limited partnership, the limited partners are merely investors: they have no responsibility for the day-to-day operations of the business.
• A general partner assumes 100% of the risk of liabilities or debts of the partnership. A limited partner only risks up to their contributions to the partnership.
• General partnerships dissolve immediately when one partner dies or if a partner cannot continue in the partnership. This is not true for a limited partnership. They continue because, as mere investors, the limited partners are not needed to run the company.
• A general partner may also bring tort, contract, or criminal charges against another general partner because each partner is considered an agent of the other. The partners have a fiduciary duty to the partnership to act in its best interest. If a partner breaches that duty, another partner may sue them for damages resulting from the breach.

What is a Partnership Agreement?

A partnership is not required to have a partnership agreement. However, those who intentionally form a partnership will most likely write up a partnership agreement. It is the contract that outlines the terms of operation for the partnership. It includes important information such as:

• The names of the partners
• The name of the partnership
• The purpose and aim of the partnership
• Division of the property distribution of the partnership’s assets. Typically, in a general partnership, the partners share equally in the rights of any property classified as partnership property.
• The division of the partnership’s profits
• The responsibilities for losses or other liabilities
• Termination provisions

The partnership agreement is an important document because it outlines the limits and scope of the partnership’s operation for the years to come.

How is a General Partnership Created?

In contrast to corporations and LLCs, partnerships do not require filing any paperwork with the state Secretary of State. So long as each partner agrees to form the partnership and intends to share in all profits and losses of the business, a general partnership is created.

Additionally, no written contract is required to create a partnership. It is, however, always advisable to create a partnership agreement with all the partners. The agreement binds the partners to the partnership and includes each partner’s rights and responsibilities for all losses and profits.

What is a Fiduciary Duty in a Partnership?

In a partnership, each partner owes the other partners a fiduciary duty, a form of trust. The specifics of the fiduciary duty may differ depending on the nature of the partnership and what is outlined in the partnership agreement. In addition, usually, state laws govern the basic fiduciary duties. These laws will vary by state.

The fiduciary duties owed by partners include:

• The duty of good faith and fair dealing
• The duty of loyalty
• The duty of care
• The duty of disclosure

The fiduciary duty of good faith and fair dealing requires the partners to act honestly and fairly. This includes actions taken in daily operations to reach the partnership’s mission statement or goals. The duty of good faith and fair dealings begins when the partnership is formed and ends only when the partnership dissolves.

The duty of loyalty requires the partners to place the partnership’s best interests above their interests. The partners must avoid conflicts of interest between the partnership and personal dealings. A partner cannot take any action that would harm the partnership for their gain.

The duty of care requires partners to act prudently and competently in the management of the partnership. The details of the duty of care are based on the standard of a “reasonable person. ” It requires the partners to act in the way that a reasonable person would do. According to the “business judgment rule,” if a partner acts in good faith and with reasonable care, they will not be liable even if their action ends unfavorably for the partnership.

The duty of disclosure requires partners to inform other partners of anything that is material to the operation of the business. For example, they must inform other partners regarding the consequences of any actions they have taken. If a partner’s action involves a conflict of interest, they must disclose that to the other partners. In addition, they must keep each other informed of the overall business health.

How Does Liability Work in a General Partnership?

All general partners are jointly and severally liable for any debts or losses incurred by the general partnership. In other words, each partner is separately responsible for the whole. Any one partner could bind the partnership to any third-party transaction even if the other partners did not consent, so long as the partner was acting within the scope of their partnership authority.

Partners need to be aware that by being part of the partnership, they may incur various risks and expose themselves to certain liabilities that they would not encounter if they were acting alone. The tradeoff is that a general partnership can allow more access to resources and more leverage in marketing and other business activities.

Do Partnerships Pay Taxes?

No. A partnership does not pay taxes on its income. It is classified by the Internal Revenue Service (IRS) as a “pass-through” entity. In a pass-through entity, individual partners pay taxes on their shares of the business income. Each partner must report their share of any profits or losses of the partnership on their tax returns. Additionally, partners must pay self-employment tax on any income the partnership pays them.

Do I Need a Business Lawyer?

Yes, it is important to have the assistance of an experienced local corporate lawyer for any general partnership issues. General partnership laws can be very confusing, and they vary by state.

A local lawyer can help you through the process and ensure the general partnership conforms to the requirements of your state. In addition, a lawyer can represent you during any court proceedings if a dispute arises that requires litigation.