Setting up a general part­ner­ship: The path to a part­ner­ship-based business

Do you want to start a business with several partners? Then perhaps the general part­ner­ship is the right choice for you. In this type of part­ner­ship, each partner can par­tic­i­pate in­de­pen­dent­ly in the day-to-day business (unless the part­ner­ship agreement or articles of as­so­ci­a­tion states otherwise). It is the simplest form of company after a sole pro­pri­etor­ship. Continue reading to find out how to set up a general part­ner­ship.

The general part­ner­ship as a legal form describes a com­mer­cial en­ter­prise run by several per­son­al­ly liable partners. Depending on the size of your business, you may be required to prepare ad­di­tion­al financial state­ments. Partners do not nec­es­sar­i­ly have to be natural persons, they can also be legal entities (e.g. another company). In this (uncommon) case, the legal form may be required to change or the business may be required to include the legal entities’ names in their own business name.

When it comes to the structure of the general part­ner­ship, there are no re­stric­tions as to who can become a partner in the business. There is also no legal minimum amount of share capital required to become a general partner.

However, there is one very important pre­req­ui­site for general partners if you want the business to be suc­cess­ful: a sense of mutual trust. After all, each partner involved is liable, not just for them­selves, but also for all the other partners involved in the business. The risk of internal conflicts should therefore not be taken lightly.

The formation process of a general part­ner­ship can be broken down into four steps.

Every general part­ner­ship needs a statute in the form of binding articles of as­so­ci­a­tion. In contrast to many other legal documents, the structure and format of the articles of as­so­ci­a­tion is not subject to any legal reg­u­la­tions. However, it should at least be set down in writing (whether a verbal contract is legally binding is dis­putable). In order to prevent disputes within the company, it is advisable to specify a number of points. These include:

• Company name (freely se­lec­table as far as possible, with the addition of general part­ner­ship at the end)
• A reg­is­tered office
• Business purpose (should be com­pat­i­ble with the char­ac­ter­is­tics of a com­mer­cial en­ter­prise)
• Names and addresses of the partners
• Deposits (amount and terms of payment are freely se­lec­table)
• Type of man­age­ment (in­di­vid­ual or overall man­age­ment)
• Dis­tri­b­u­tion of profits and losses among partners
• Res­o­lu­tions on the ter­mi­na­tion and con­tin­u­a­tion of the company in the event of a partner quitting or dying (e.g. to prevent suc­ces­sion problems if the capital share of a deceased partner is trans­ferred to the other par­tic­i­pants)

A general part­ner­ship will require no­ta­riza­tion if real estate (land, buildings) is brought as initial capital into the part­ner­ship as a con­tri­bu­tion in kind by one of the partners. However, you should not shy away from con­sult­ing a legal advisor in the event of am­bi­gu­i­ties, who will advise you when drawing up the articles of as­so­ci­a­tion. As soon as the contract has been signed, your general part­ner­ship will initially be regarded as a part­ner­ship under civil law. Outwardly, the company becomes effective as a general part­ner­ship as soon as it begins trading, and has been reg­is­tered with the local Secretary of State.

General part­ner­ships must register with their local Secretary of State before they can begin trading. In some states, this reg­is­tra­tion procedure is not formally required, but general part­ner­ships will probably still be required to obtain the necessary business licenses and fic­ti­tious name cer­tifi­cates. The vast majority of busi­ness­es will have to connect with their Secretary of State on some issue or another when setting up their general part­ner­ship.

For example, reg­is­ter­ing your general part­ner­ship with the Secretary of State in the state of Cal­i­for­nia is a straight­for­ward process, although not oblig­a­tory. Should you choose to register, simply fill out a Statement of Part­ner­ship Authority form. This form has a filing fee of $70.

In the state of Vermont on the other hand, general part­ner­ships are required to register with the Secretary of State and must renew that reg­is­tra­tion every five years. Reg­is­tra­tion can be done online here or through the mail using this form. The filing fee is $125.00.

Re­gard­less of what state your business is in, the necessary forms will ask for the following in­for­ma­tion:

• Name and address of each partner
• Company name and reg­is­tered office address
• Contact in­for­ma­tion for the business’s reg­is­tered agent

Once you have received the relevant cer­ti­fi­ca­tions and con­fir­ma­tion of fee payments, your general part­ner­ship is legally open and ready for business. Remember: from now on, every document of business cor­re­spon­dence you produce must contain your company name, the legal form “General part­ner­ship,” and the location of the reg­is­tered office. You are also re­spon­si­ble for notifying any changes like the with­draw­al of partners or a new official office address im­me­di­ate­ly with the Secretary of State.

Depending on what kind of business you are operating, you may be required to register for a trade license. Different states have different business reg­is­tra­tion and licensing agree­ments. You can find out more in­for­ma­tion about what kind of re­quire­ments your state has by visiting the Small Business As­so­ci­a­tion’s website.

One of the most at­trac­tive aspects of choosing a general part­ner­ship as your business structure are the low costs as­so­ci­at­ed with it. There are no minimum capital con­tri­bu­tions required of partners, and a formal part­ner­ship agreement is usually un­nec­es­sary, so there aren’t the usual legal fees as­so­ci­at­ed with company formation.

However, it is worth­while to have a part­ner­ship agreement formally drawn up by a legal pro­fes­sion­al, just to ensure that the interests of all partners are protected. While it might be an in­con­ve­nient up-front cost, the legal fee required to create a part­ner­ship agreement is a one-off fee and may end up saving partners a tremen­dous amount of money later on if business disputes arise. Depending on the length and depth of the agreement, as well as the area costs and in­di­vid­ual lawyer rates, general fees for a part­ner­ship agreement draft will set you back between $500-$2,000.

On top of this, there may be ad­di­tion­al fees for filing with your Secretary of State, and for obtaining business and trading licenses, but these will vary depending on your state’s fees and re­quire­ments.

Once the company has been founded, there are certain oblig­a­tions that both the business and the partners must meet. The law provides in­for­ma­tion on this, but this in­for­ma­tion only applies to the extent that the part­ner­ship agreement does not stipulate otherwise.

Ac­cord­ing­ly, each partner is entitled and obliged to manage and represent the company in­di­vid­u­al­ly. This applies, however, only to the usual day-to-day business (i.e. the purchase of goods, sales, talks, etc.) and is not binding. Trans­ac­tions beyond this will require the consent of all parties involved. If a partner exceeds their stip­u­lat­ed duties when con­duct­ing business, is it still legally effective. However, the other partners may then be entitled to financial com­pen­sa­tion.

All partners must share the profits and losses of the business equally, unless stated otherwise in the articles of as­so­ci­a­tion.

Profits of a general part­ner­ship are not liable for direct income or cor­po­ra­tion tax. Instead, it is a “flow-through” entity, which means that each partner must pay income tax on their share of the profits. However, your company may still be required to pay state sales tax and/or payroll fees for any ad­di­tion­al staff they may employ.

As mentioned pre­vi­ous­ly, the partners of a general part­ner­ship are liable with their entire assets for any financial oblig­a­tions the general part­ner­ship has, namely:

• Primarily and directly
• Un­re­strict­ed­ly
• Jointly

This cannot be mitigated by agree­ments with third parties. Due to the primary, direct liability, a general part­ner­ship creditor may even address their claim against the general part­ner­ship partners without first having to claim against the company. Joint and shared liability means that each partner is jointly liable for their col­leagues. If a partner cannot settle an invoice, the debt is dis­trib­uted among their partners. However, these partners can then demand com­pen­sa­tion in return. This full liability extends after a partner has left a general part­ner­ship, or the general part­ner­ship has been dissolved (unless otherwise stated in the part­ner­ship agreement).

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