If you are considering launching a startup with one or more partners, you will likely have considered registering your business as a general partnership. In a legal context, this is a business relationship conducted between at least two individuals who voluntarily agree to share all: profits, liabilities, and assets of the business in question.
The process of setting up a general partnership is quite similar to that of a sole proprietorship; this means that it involves a very small number of procedural requirements.
General partnerships are also scrutinized to a much lesser extent than their incorporated counterparts (such as LLCs and Incorporations), which means that starting entrepreneurs will not have to worry about satisfying a prolific number of federal regulations and compliance protocols straight from the get-go.
Below, we will examine the most important advantages and disadvantages of general partnerships in 2021, and conclude what types of businesses (and business owners) would currently benefit from such a structure following the aftermath of the unprecedented COVID-19 pandemic.
Pros Of A General Partnership
Registering your business as a general partnership can provide a plethora of direct advantages. For example, by liaising with other individuals, you will inadvertently be forced to critique each other’s ideas and suggestions, and will likely have a much better chance of launching your startup in a structured, calculated, and safe manner.
You will also- generally speaking, have increased capital, as your partners’ resources and investments will ultimately supplement your own.
The three most noteworthy features of General Partnerships are:
They have a simple tax structure- Owners of general partnerships enjoy ‘’pass-through taxation’’; this means that all of their business’s profits are directly funneled into individual owners’ personal tax returns. This contrasts sharply with Corporations, which are subject to double taxation as shareholders are required to pay income tax on any dividends received despite having already paid a federal corporation tax on those dividends.
They are quick and simple to establish- As already touched on above, general partnerships are extremely easy to set up. No filing procedures with your state are required in the registration process, and (from a legal context) all you really need is a binding verbal contractual agreement with all of your involved partners. This means that registering your general partnership can generally be quite affordable.
Relatively easy to dissolve- Even though this may not sound as important as the aforementioned two points, it can be extremely advantageous if and when you decide that you want to terminate your business, or if you unexpectedly realize that you need to, such as if another partner passes away or retires.
Cons Of A General Partnership
Despite providing a plethora of advantages, registering your business as a general partnership undoubtedly includes a few disadvantages that need to be considered by aspiring entrepreneurs- especially in relation to the tax benefits that can be enjoyed via incorporated structures.
The two most significant disadvantages of General Partnerships are:
Partners are liable for each other’s actions- This is undoubtedly one of the most significant disadvantages of forming a general partnership. Unless you can reliably trust your future partner(s), registering your company as a general partnership may expose you to significant liability and future claims that you will not be able to control.
No Limited Liability- Unlike incorporated business structures, owners of a general partnership do not benefit from having limited legal liability (as their business is not an entirely separate financial entity to themselves under law). This means that all of their personal belongings and assets will not be protected if their business accrues significant debt in the future and consequently becomes insolvent.
Conclusion: Is A General Partnership Right For You?
Overall, whether a general partnership is right for you or not will depend on a variety of factors (including how well you know and trust your future partners).
Whereas setting up as a general partnership can allow you to launch your business extremely fast and grant you a certain ‘’peace of mind’’- as you will not be subject to any federal scrutiny, the same effect can be just as easily achieved by hiring affordable, specialized incorporation services which handle all of the procedural prerequisites of incorporating your business for you.