What is a General Partnership?

If you are wondering, “What is a general partnership in business?” you have come to the right place. In business, when you hear the word partnership, although there are other types of partnerships, it generally refers to a general partnership business structure. It is one of the common types of business organizations. General partnership companies allow for an easy business setup. Read on to learn how this type of business structure works.

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How does a general partnership work?

In general business partnerships, there are two or more partners that are part-owners of the legal entity. Each is liable for any partnership debt or judgments taken on by the business. There is no limited liability, which means all the partners’ assets can be taken in a lawsuit or be targeted to settle business debts should the partnership become insolvent. Any business partner can be sued for the full amounts of any business debt if they do not cover their financial obligations.

Another attribute of the general partnership is that every business partner has so-called “agency powers,” which means any general partner can bind the entire business to a contract or business deal.

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What are the benefits of a general partnership?

General partnership businesses have advantages that include structure and control. Unless by other agreement, business profits are shared equally among the partners. Usually, there is a contract of some sort that outlines how the sharing of profits and losses will be divided among the individual partners.

In a general partnership, each partner has an equal right to participate in the management and control of the business operation and can make a business decision. The partners have the option of resolving disagreements by majority rule or by developing a voting or other dispute resolution system. Some partnerships provide for certain electees to manage the business partnership, like a company board. However, many do not. One reason for forming a general partnership is freedom from bureaucracy associated with other business structures, such as corporations.

The partners have near-complete discretion over who can become a member of the partnership. Unless otherwise provided in the business partnership agreement, no one can become a member of the general partnership without the consent of all partners.

A partner can assign their share of business profits and losses and the right to receive distributions. This is called a transferable interest. This partnership interest can be applied, with an agreement, towards paying to satisfy a judgment against that partner.

How do you start a general partnership?

Another benefit of the general partnership in a business operation is that there are not many steps to starting one. The process is fairly simple as there is no need to file legal documents with the state as with more a specific business entity like a corporation or a limited liability partnership. All the partners need to do is draft a general partnership agreement.

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Resources:

1. https://www.bdc.ca/en/articles-tools/entrepreneur-toolkit/templates-business-guides/glossary/general-partnership#:~:text=A%20general%20partnership%20is%20a%20business%20established%20by%20two%20or%20more%20owners.&text=The%20owners%20or%20partners%20can,organization%2C%20its%20goals%20and%20values
2. https://www.investopedia.com/terms/g/generalpartnership.asp
3. https://bench.co/blog/starting-a-business/general-partnerships/

Case Studies: General Partnership Business Structure

Case Study 1: The Creative Startup

Alice and Bob, two talented graphic designers, decide to form a general partnership to launch a creative design studio. They bring complementary skills and shared passion to the business.

Initially, the partnership runs smoothly, with both partners equally contributing to the success of the studio. However, as the business grows, they face disagreements about the direction of the studio, as Bob wants to focus on web design while Alice prefers branding and print media.

To overcome the challenges, Alice and Bob decide to seek the guidance of a business mediator. With the mediator’s help, they reach a compromise, deciding to offer specialized design services to clients, leveraging both their strengths. They continue to share profits equally but agree to consult each other on significant business decisions.

Case Study 2: The Struggling Restaurant

Alex, Charlie, and David, longtime friends and passionate food enthusiasts, establish a general partnership to open a restaurant serving international cuisine.

In the early stages, the restaurant gains popularity, but financial difficulties arise due to unexpected overhead costs and fluctuating customer demand. The partnership’s unlimited liability becomes a concern, as personal assets of the partners are at risk.

Seeking legal counsel, the partners decide to restructure the business as a limited liability partnership (LLP). This change allows them to safeguard their personal assets while still maintaining their shared ownership and control over the restaurant. Additionally, they implement cost-cutting measures and marketing strategies to attract a more consistent customer base.

Case Study 3: The Departing Partner

Emily, Fiona, Grace, and Henry establish a general partnership to run a marketing consultancy. After several years of successful collaboration, Emily decides to pursue a different career path and wants to leave the partnership. Emily’s departure raises concerns about the future of the consultancy. The remaining partners must decide whether to buy out Emily’s share or bring in a new partner.

The partners hold a series of meetings to discuss the options. They agree to find a suitable replacement for Emily and make a new partner part of the business after unanimous consent. The departing partner’s share is transferred to the new partner with a clear agreement on profit sharing and responsibilities.