A General Partnership is one of the easiest business entity types to create. Why? They require minimal set-up and paperwork as well as maximize your flexibility with businesses structure. The downside to creating a GP is lack of liability protection. As a result, owners may have to pay self-employment taxes on earnings from ordinary income. Explore all of the advantages and disadvantages of a GP before you commit.
How does a General Partnership work?
A General Partnership is true to its name. Creating a GP may be ideal if you want to avoid strict or specific structural guidelines. GPs assume that owners are active in management and in day-to-day operations. There aren’t any requirements for an official partnership agreement or any legal paperwork except the tax return filing. Although not necessary, partners often choose to document their agreement in writing.
Taxation for a General Partnership
General partnerships are usually not taxed as an entity. Instead, income that flows through gets taxed on the owner’s return. So, you can avoid the double taxation that usually occurs with C-Corporation entities. Since we assume that all owners are involved in day-to-day operations, they are subject to self-employment tax on the ordinary income earnings of the partnership. Another benefit is that you don’t have to pay an annual tax for owning a GP. This tax can be very expensive for other entity types such as Limited Partnerships and Limited Liability Companies.
Liability Protection
One of the biggest disadvantages of creating a General Partnership is lack of liability protection. If the business fails due to a partner’s legal or financial issues, then all partners may be held accountable. If liability protection is important to you, add subsidiary companies underneath a GP. Keep in mind adding subsidiaries may add complexity to the structure. In most cases, it may be more cost effective to go with another entity type altogether.
A General Partnership is the perfect entity type for owners who want freedom and flexibility in their structure. GPs are great if you’re embarking on a new venture with a partner. They’re simple and cheap to create. GPs should only be used where the partners already have limited liability protection or there is little risk of personal liability. Seek advice from a professional to be sure you’re making the best decision.
By David Olson, CPA
Manager at WHH
