As your business grows, you may consider redefining the roles of investors, increasing ownership and leveraging more financial resources. One of the ways to do this is to enter into a partnership agreement with different individuals or entities.
Partnerships involve two (or more) entities that have agreed to invest in the business with the understanding that each will gain a share of any profits that are made. Generally, partner agreements are structured in either a limited partnership or general partnership. Here, we’re focusing on the latter.
What Is a General Partnership?
In a general partnership, each of the associated partners is responsible for the management, debts, and other liabilities of the business on equal footing. This means that each general partner is jointly responsible for any of the business’s obligations, regardless of who took out the debt.
The most notable disadvantage with a general partnership is that all partners in an agreement are responsible for the actions of the other partners, which opens the door for potential litigation. Liability issues mean that any general partner can be held liable for the actions or negligence of the other partners, so it’s best to proceed with caution when you’re working with a strong legal team.
Who Can Be a General Partner?
Typically, a general partner can be an individual or an entity, including a corporation, limited liability company (LLC) or an existing partnership. It’s important to note that a general partner needs to understand what their personal and business liability is, as well as any legal obligations that come with the general partnership agreement.
The amount that general partners invest does not need to be equal. While general partners need to receive equal voting rights, they can structure their capital contributions differently.
Is a General Partnership the Right Choice for Your Business?
Choosing the most effective legal model for your business can be daunting. A general partnership has its advantages and disadvantages, and it may not be the right fit for every business. Before you decide, it’s important to consider the scope of responsibility and liabilities associated with the partnership, as well as your personal and financial goals for the business.
By understanding the basics of a general partner agreement and the risks associated with it, you can make an informed decision as to whether a general partnership is the right move for your business.