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You might not know this one important fact about general partnerships

General partnerships are one of the easiest business entities to form; so easy, in fact, that they can form on their own. If you can show a court that you and at least one other person are performing business tasks with the intent of earning a profit together, you can likely establish that you are in a general partnership. Such arrangements are simple, flexible, and cheap (at least to set up).

Unfortunately, those benefits alone have enticed plenty of people into general partnerships without agreements, which can be a rather costly decision in the long-term. In fact, many people have likened general partnerships to marriage because, without the right agreements in place, general partners can be personally liable for each other's actions.

This is not to say that general partnerships are inherently bad, or risky, or problematic. There are many times that a general partnership is the best way to organize a business enterprise. Besides being easy to establish and generally easier to manage, general partnerships have simplified, "flow through" taxes. This means that, unlike other business entities, general partnerships do not pay separate taxes. Instead, business gains and losses flow through to the partners, who list them on their own tax returns.

If you are going to set up a general partnership, however, you should be aware of the risks and consider if another form of business entity is better suited to your business needs.

They did what? Liability for your partner's actions and business debts

There is one major drawback to general partnerships: Business owners are liable for the actions of their business partners and for any business losses. Did your partner make a bad decision? You may be liable. Was your partner sued and unable to pay the full amount of the judgment? You may be liable. Did your business collapse into debt because of that decision or judgment? The court may be able to take your personal assets to satisfy the business debt.

Sound a bit familiar? Just like in marriage, you are responsible for what your partner does with your (the business's) money.

How to avoid the issues with general partnerships

When you are forming a business, it is important to do your own research and speak with an attorney experienced in setting up small businesses. Is a general partnership right for you? Or is another option, such as a Limited Liability Company (LLC) a better choice? An attorney can walk you through all of your options and help you consider which one best suits your business goals. If a general partnership is the best option, you can limit your personal exposure by working with a lawyer to draft a thorough and well-drafted written agreement.

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