Advantages and Disadvantages of General Partnerships

General partnerships consist of two or more partners who are

General partnerships are formed by individuals. They are taxed in the same manner as a sole proprietorship, meaning that each partner includes business income on his or her personal income tax return. Each partner can also deduct pro rata losses from the business on his or her own individual tax return.

General partnerships provide a means of raising capital quickly, and can also allow several people to combine resources and expertise. However, several problems can occur as well.

Disadvantages of a General Partnership:

• Partners may have different visions or goals for the business.
• There may be unequal commitment in terms of time and finances.
• There may also be personal disputes.
• Partners are personally liable for business debts and liabilities.
• Each partner may also be liable for debts incurred, decisions made, and actions taken by the other partner or partners.
• At some time, there most certainly will be disagreements in management plans, operational procedures, and future vision for the business.
• You may encounter difficulty in attracting investors.

For these and other reasons, general partnership agreements should be drawn up carefully with legal counsel, and signed by all partners. Additionally, there should be a means in place of dissolving the partnership in the case of death, disability, or if one partner should want out of the business for any other reason, personal or professional.

General partnerships can be less expensive and require less paperwork and formalities than a corporation, but the partnership agreement is a key element and should be drawn up with due diligence on the part of all parties.

Advantages of a General Partnership:

• You have a shared financial commitment.
• You can pool resources, expertise, and strengths.
• There are limited startup costs.
• There are few formalities (mostly applicable licenses).

General partnerships can thrive when each partner brings a specific strength to the business. If each partner takes on a defined role and there is general agreement on the business plan, goals, and visions from the outset, a partnership can be advantageous. Work can get done more quickly, and having several partners involved will increase the potential of acquiring resources and attracting backers. In the end, the success of such an endeavor depends largely on the personalities of the parties involved.