General Partnership: Definition, How It Works, and Key Considerations

What is a general partnership?

A general partnership is an unincorporated business owned by two or more people who agree to share management, profits, and liabilities. It’s a pass-through entity: the partnership itself does not pay income tax; profits and losses flow through to partners’ personal tax returns. Partners typically have unlimited personal liability for the partnership’s debts and obligations.

How general partnerships work

• Formation: No formal state registration is usually required to form a general partnership; partners can simply agree to operate together. Local permits or licenses may still be needed.
• Flexibility: Partners can structure management and profit sharing as they choose, providing simpler and faster decision-making than many corporations.
• Minimum requirement: At least two partners who accept joint liability.

Key elements

• Partnership agreement: A written agreement is strongly recommended (oral agreements can be valid). It should specify:
• Ownership and profit-allocation percentages
• Management roles and decision rules
• Procedures for departures, death, or dissolution
• Dispute-resolution methods
• Management and decision-making:
• Absent an agreement, most states apply rules from the Revised Uniform Partnership Act (RUPA).
• Each partner can generally bind the partnership in contracts and transactions, so partners often limit exposure by defining which decisions require unanimity or a majority vote.
• Compensation:
• Partners receive distributions of profit rather than traditional salaries, per the partnership agreement or, if none, equal shares under RUPA.
• Undistributed earnings can be reinvested in the business.
• Liability:
• Partners have joint (and often several) unlimited personal liability for partnership debts and for actions taken by other partners and employees.
• In some jurisdictions, a plaintiff can sue any partner for the full amount of a judgment.
• Fiduciary duties:
• Partners owe the partnership duties such as good faith, loyalty, care, and disclosure. Breaches can create personal liability.
• Taxes and filings:
• The partnership files Form 1065 (informational) with the IRS and provides each partner a Schedule K-1 reporting their share of income, deductions, and credits.
• Partners report partnership income on personal returns and generally pay self-employment tax using Schedule SE.
• K-1s and Form 1065 filing deadlines are set by the IRS (partners should check current annual dates).

Pros and cons

Advantages
– Simple and inexpensive to form and dissolve.
– Flexible management and fewer formalities than corporations.
– Pass-through taxation avoids double taxation.
– Limited external reporting requirements in many jurisdictions.

Disadvantages
– Unlimited personal liability exposes partners’ personal assets.
– One partner’s actions can create obligations for all partners.
– Potential for disputes that can be harmful without a clear agreement.
– May become unsuitable as the business grows or takes on greater risk.

Common uses and examples

General partnerships are common for small, professional, or family-run businesses where simplicity and close managerial control are priorities—examples include small law firms, medical or dental practices, architectural partnerships, and family businesses.

General partnership vs. LLP

A limited liability partnership (LLP) also passes income through to partners but generally limits personal liability for partnership debts and for other partners’ actions. An LLP is often chosen when partners want liability protection while retaining partnership tax treatment.

Is a general partnership right for you?

A general partnership can be a good choice when partners value simplicity, low start-up cost, and flexible control. However, because of unlimited personal liability, partners should carefully consider whether liability exposure is acceptable or whether a limited-liability structure (LLP, LLC, or corporation) is more appropriate as the business grows.

Bottom line

A general partnership is an easy and flexible way for two or more people to run a business together, with profits and losses passing through to partners’ personal tax returns. Its main trade-off is unlimited personal liability, so a clear partnership agreement and careful assessment of risk are essential.