What is a general partnership?

 

A partnership is a single business where two or more people share ownership The owners are all personally and equally liable for any legal actions and debts the general partnership may face. This means that if the business itself can't pay a creditor, such as a supplier, lender, or landlord, the creditor can legally come after any partner's house, car, or other possessions for repayment of the debt. Additionally, subject to certain limitations, any individual partner can usually bind the whole business to a contract or other business deal.

 

How is a general partnership formed?

 

A general partnership is created whenever two or more people agree to do business together for profit, even if there is no intent or written agreement to form a partnership. While there are no formal filing or registration requirements needed to create a partnership, partnerships must comply with registration, filing, and tax requirements applicable to any business. The following are the basic steps required to form a general partnership in Delaware and New York.

 

1.   Choose a Partnership Name

 

In Delaware, a partnership may use the surnames of the individual partners or may use a fictitious business name. If a fictitious business name is used, it must be distinguishable from the name of any other company currently on record. The partnership’s name should not be similar to another registered business because of common law and federal trademark law protections. The availability of the intended name for the partnership should be checked as follows:

 

  • In Delaware, the office of the Delaware Secretary of State

 

  • In New York, the office of the New York Department of State

 

  • U.S. Patent & Trademark Office: (Click on the TESS link under Tools.)

 

2.   File Partnership Name

 

  • Delaware requires that if a fictitious name is used for the partnership, then that name must be registered prior to the business start date. In this case, the partnership’s trade name must be registered by a notarized application in the Prothonotary’s office, which is in the superior court of each county where the partnership does business. The application for filing a trade name certificate is available from the Delaware State Court.

 

  • New York requires that if a fictitious name is used for the partnership, then that name must be registered in the county clerk’s office in the county where the partnership’s business is located. The appropriate form for filing a fictitious business name in New York is available from the county clerk’s office. The filing fee varies by county.

 

3.   Draft and Sign a Partnership Agreement

 

Although Delaware and New York do not require that a formal partnership agreement be entered into, doing so is highly advisable. A clear and comprehensive partnership agreement can greatly contribute to the smooth running of the partnership by eliminating or mitigating business misunderstandings among the partners. Some of the key items that are typically addressed in a written partnership agreement are:

 

  • each partner’s contribution to the partnership

 

  • the allocation of profits, losses, and draws

 

  • the partners’ authority and management duties

 

  • voting rules for decision-making

 

  • how to admit new partners

 

  • what happens upon the bankruptcy, withdrawal, or death of a partner, and

 

  • how to resolve disputes.

 

4.    Obtain Licenses, Permits, and Zoning Clearance. Depending on the partnership’s business, it may need to obtain certain business or professional licenses depending on the type of business activity that partnership is engaged in. 

 

  • All Delaware businesses must obtain a Delaware business license. Delaware provides a one-stop online registration tool to help new partnerships get the appropriate licenses and permits. A business can register for all necessary licenses by going to the Delaware One-Stop Registration. Delaware provides a comprehensive database of every occupation that requires a license by a partnership. You can obtain this information from the Delaware State Onestop Website, a service of the State of Delaware. Additionally, Delaware partnerships may need to obtain other state, city and local licenses and permits depending on the partnership’s business.

 

  • Similar to Delaware, New York provides a comprehensive website of every occupation that requires a license by a partnership. You can obtain this information from the New York Permit Assistance and Licensing.

 

5.   Obtain an Employer Identification Number.  Partnerships are required by the IRS to obtain an Employer Identification Number, or EIN. Partnerships must have an EIN regardless of whether or not they have employees. Registering for an EIN can be done online at the IRS website.

 

6.   Obtain General Liability Insurance. Although not legally required, it is highly advisable that general partnership obtain general liability insurance to protect partners who are personally liable for all debts and obligations of the business.

 

How is a general partnership taxed?

 

A partnership is not considered to be an independent legal entity that is separate from its owners / partners for tax purposes.  A partnership is considered to be a  "pass-through" entity, which means that all of the profits and losses of the partnership "pass through" the business to the partners, who pay taxes on their share of the profits (or deduct their share of the losses) on their individual income tax returns. Each partner's share of profits and losses is usually set out in a written partnership agreement.

 

Even though the partnership itself does not pay income taxes, it must file Form 1065 with the IRS. This form is an informational return the IRS reviews to determine whether the partners are reporting their income correctly. The partnership must also provide a Schedule K-1 to the IRS and to each partner, which breaks down each partner's share of the business's profits and losses. In turn, each partner reports this profit and loss information on his or her individual tax return (Form 1040), with Schedule E attached.

 

What are the advantages of a general partnership?

 

  • Easy and Inexpensive. Partnerships are generally an inexpensive and easily formed business structure. Most of the time and expense is usually spent on creating an effective and comprehensive partnership agreement. It is highly advisable to engage the services of experienced counsel to ensure that the partnership agreement is clear and complete in capturing all the salient aspects of the partnership’s business and relationships among the partners.

 

  • Shared Financial Commitment. In a partnership, each partner is equally invested in the success of the business. Partnerships have the advantage of pooling resources to obtain capital. 

 

  • Complementary Skills. A good partnership should reap the benefits of being able to utilize the strengths, resources and expertise of each partner.

 

  • Partnership Incentives for Employees. Partnerships have an employment advantage over other entities if they offer employees the opportunity to become a partner. Partnership incentives often attract highly motivated and qualified employees.

 

What are the disadvantages of a general partnership?

 

  • Joint and Individual Liability. Similar to sole proprietorships, partnerships retain full, shared liability among the owners. Partners are not only liable for their own actions, but also for the business debts and decisions made by other partners. In addition, the personal assets of all partners or any individual partner can be used to satisfy the partnership’s debt.

 

  • Disagreements Among Partners. With multiple partners, there are bound to be disagreements. Partners should consult each other on all decisions, make compromises, and resolve disputes as amicably as possible.

 

  • Shared Profits. Because partnerships are jointly owned, each partner must share the successes and profits of their business with the other partners. An unequal contribution of time, effort, or resources can cause discord among partners.