Small business: should you enter a general partnership?

When you start a small business, there are several ways to structure your company. One of the simplest, and most popular, structures is a general partnership.

Legally, you do not even need to file paperwork to create a general partnership. You just need to create a for-profit business, and enter into business with at least one other partner. Despite their simplicity, general partnerships come with financial risk. What should you know before you enter into a general partnership?

Choose your business partner carefully

If you enter into a general partnership, you and your partner will equally divide the business management, profits and debts. Since you both hold equal decision-making authority, you need to choose a like-minded partner who you can trust to make sensible business decisions. A great friend is not automatically a great business partner.

Evaluate your potential partner’s financial responsibility. Be wary of entering into a partnership with an individual with different spending habits than you. Once you enter into a partnership, you are both liable for the business’ debts. Therefore, if your partner overspends, creditors are able to go after your personal assets to reclaim payment.

Sit down with your potential partner and have an honest discussion about your business plan. Discuss goals, spending and profit expectations and where you see your business going in the future. You should be aligned on major business decisions, and share a similar business philosophy.

You have a responsibility to your other partners

When you enter into a general partnership, you assume a duty of loyalty and a fiduciary duty towards your partners. This means that each partner needs to act in the partnership’s best interest. They cannot make decisions that will boost their own wealth at the expense of the company.

Additionally, each partner must equally control the company and share in its profits. A partner’s level of involvement and responsibility can be legally adjusted if explicitly agreed to in writing.

You can protect yourself in a business partnership

There are ways to protect yourself when you enter into a partnership.

1. Partnership agreement: Create a written partnership agreement to determine: how/when a partnership can terminate, how profits/losses will be shared, who has control of the business, each partner’s responsibilities, decision-making powers etc.
2. Consider a limited partnership: If you enter into a limited partnership, you are protected from the company’s debts. Creditors can only take assets from you up until the amount of your business investment. Entering into a limited partnership removes you from the day-to-day management of the company. A general partner manages the business, while limited partners are investors who share in the business profits.
3. Discuss options with an attorney. Discuss your business idea with an attorney who will help you determine what type of business to create, and how to form the business to protect your financial future. An attorney can also help you draft partnership agreements, and provide guidance on operating your business on a day-to-day basis.