General Partnership: Legal Attributes

A general partnership (“GP”) is a form of business entity in which two or more co-owners engage in business for profit and provide unlimited personal liability for losses. So long as the parties have jointly agreed to carry on a business for profit, they are general partners even though they have no specific intent to be general partners or have not reached an agreement on how to share profits or losses. The corollary that follows is that one “partner” cannot operate in partnership form after departure of the other partner.

As co-owners, each general partner has equal rights to participate in the management and control of the business. In some respects, it is because of this management control that each general partner puts his or her entire personal resources at risk for debts and obligations of the partnership business, i.e., each partner is jointly and severally liable to the partnership obligations and liabilities.

There are many default rules that apply to the partnership form, including but not limited to, management and control; authority; sharing of profits; and no right to compensation for services performed (of course, the partnership agreement may vary these default rules). GPs are governed by the Uniform Partnership Act of 1994 under the California Corporations Code, Title 2, Chapter 5.

As a practical matter, it is usually inexperienced business owners who end up forming a general partnership; typically, the GP is an unintended consequence of a joint venture between two owners who engage in business with haste absent any real planning or procedures (setting yourself up for inevitable disputes and personal liability).

GP: Formalities

Practically non existent other than complying with any applicable licensing requirements. No special formalities are required to form a general partnership; it may even be predicated on an oral agreement. However, a partnership whose name does not include the name of each general partner must comply with the fictitious business name statute under Business and Professions Code Section 17900 et seq.

The Secretary of State does provide for a statement of partnership authority and statement of partnership denial recordation (GP-1 and GP-2). Essentially the forms provide express authorization or express denial of authorization to specified partners with respect to the execution of instruments transferring real property held in the name of the partnership. Once filed, this document must be recorded in the county where the real property is located to have any force. With this filing, third parties are deemed to have constructive knowledge of partnership authority.

Lastly, although no partnership agreement is required, it is recommended that a partnership agreement be drafted to include all pertinent terms and arrangements.

GP: Formation Start Up Cost

No filing fees unless obtaining a fictitious business name statement or business license. Please use the following Comparison Chart for side by side comparison.

GP: Tax Attributes

GPs can elect the tax advantages of a partnership––i.e., pass-through taxation. Because of this pass-through taxation, the entity itself is exempt from both federal and state taxation. Once the partnership expenses have been deducted, the remaining balance of profit is allocated to the partners. As with all partnerships, the GP must declare its operating losses and profits to the IRS and then each partner must file their respective individual taxes (similar to an S-corp yet more complicated than a single-member LLC filing). It should be noted that in addition to state and federal income taxation, the partners are subject to self-employment tax on all income (no allocation between distribution and salary).

Please use the following Entity Selection Tax Cheat Sheet to predict your tax liability.