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General Partnerships – What, Why, and How?

Updated: Nov 3, 2023

What is a General Partnership?

A general partnership is a type of business entity that is formed when two or more persons join together in order to operate a business for a profit.

(Note: "persons" above is not limited to individuals; "person" includes corporations, LLCs, LLPs, other business and commercial entities, trusts, etc.; some states even spell this out; see Cal. Corp. Code section 16101(a)(13), Tex. Bus. Orgs. section 1.002(69-b).

Why form a general partnership?

Like a sole proprietorship, general partnerships are easy to form. You barely have to do anything. The only extra "step" from sole proprietorship to general partnership is the addition of one or more "partners."

How do you form a general partnership?

Find another person and start trying to make a profit. That's literally all you have to do.

You don't even have to intend to form a partnership. See Cal. Corp. Code section 16202(a), Tex. Bus. Orgs. section 152.051(b)(1).

Of course, you might need business or occupational licenses, a fictitious or assumed business name statement, etc., but those are operational, not formation, requirements.

What are the pitfalls of a general partnership?

As with sole proprietorships, you have no limited liability. In addition to that, you have the added complication of having a partner with whom you might have disagreements. That is why your business attorney, even if you insist on remaining a general partnership, may insist that you have a partnership agreement. Without a partnership agreement, your partnership will be subject to your state's default rules.

Do I need a contract with my partners?

You probably aren’t legally required to have a partnership agreement. California and Texas don't require them. But you ought to have one to avoid being forced into your state’s default rules for partnerships.

How do you split profits? How do you allocate debt? What do you do if a partner dies? What happens to the partnership if a partner dies? What if you’re sued in a state you’ve never been to?

The answers to these questions should be outlined in your partnership agreement. If they aren’t, a court will impose default rules to which you haven’t agreed (and might not have even heard of).

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