What Is a General Partnership?

You can establish a general partnership if you are going to own or operate your business for profit with more than one person. Partnerships are legal entities separate from the partners themselves. Two kinds of partnerships are available: general and limited partnerships.

a. Formation: A general partnership is formed by an oral or written partnership agreement, but your partnership agreement should be in writing to prevent future problems. Each partner usually makes a substantial investment in the business. This means that when a general partnership is created, each partner contributes cash, property or services in exchange for an "interest" (the legal ten-n for some kind of ownership) in the partnership.

b. Responsibility: In a general partnership, each general partner has equal responsibility and authority for running the business. Each partner is involved in running the business's day-to-day activities and making management decisions. Any partner can represent the partnership in business matters without the knowledge of the other partners. In other words, the actions of one partner can bind the entire partnership. So, if one partner signs a contract on behalf of the partnership, the general partnership and each partner are responsible under the contract.

C. Duties to each other: According to the law, partners are required to treat each other fairly and with the highest degree of loyalty. In legal terms this requirement is called a "fiduciary duty." This means that you as a partner cannot do things related to your business that would harm your partner or only serve to benefit you individually. For example, a partner cannot open a business, which competes with the partnership business. This kind of activity is what lawyers call a "conflict of interest." The law says that partners must avoid conflicts of interest.

d. Profit, losses, and salaries. Partners are treated as owners of their partnership much like a sole proprietor is treated as the owner of a sole proprietorship. Generally partners do not pay themselves salaries, but instead share in the profits and losses of the partnership. At the end of the year, partners report their share of profits and losses on their personal income tax return. This is true even if the profits are kept in the business and not distributed to the partners.