By Jake Lawson, LLC Formation Strategist
Starting a general partnership is remarkably simple—so simple that you might accidentally create one just by going into business with a friend. But after helping over 1,200 entrepreneurs structure their businesses, I’ve learned that “simple to start” often translates to “expensive problems later.”
Let me walk you through everything you need to know about general partnerships, including why most multi-owner businesses I work with choose a different structure entirely.
What Is a General Partnership?
A general partnership is the default business structure that kicks in automatically when two or more people start doing business together with the intent to make money. No paperwork required, no state filings needed—just two people agreeing to work together, and boom, you’ve got a partnership.
The basic reality: Each partner owns a share of everything—assets, profits, debts, and liabilities. There’s no legal separation between the partners and the business.
Examples of accidental partnerships:
- Two friends starting a food truck together
- Siblings launching a consulting business
- College roommates creating an online store
- Neighbors offering landscaping services
The moment you start working together to generate income, you’re legally operating as a general partnership—whether you intended to or not.
Types of Business Partnerships (And Which Ones Actually Matter)
There are several partnership structures, but most are specialized setups for specific industries:
General Partnership: Standard partnership with shared ownership and liability
Limited Partnership: Has general partners (who run things) and limited partners (who just invest)
Limited Liability Partnership (LLP): Mainly used by professional firms like law or accounting practices
Limited Liability Limited Partnership (LLLP): Complex structure for sophisticated investors
For most small businesses, you’re choosing between a general partnership and just forming an LLC instead. The specialized partnerships require additional filings and are typically used for raising capital or professional services with specific liability concerns.
The Real Advantages of General Partnerships
Let me be honest about what actually works with this structure.
Dead Simple to Start
No state filing fees, no registered agent requirements, no ongoing compliance obligations. You shake hands with your partner today, you’re in business today.
Pass-Through Taxation
Business profits and losses flow directly to partners’ personal tax returns. The partnership files an informational return (Form 1065) but doesn’t pay taxes itself.
Flexible Profit Sharing
Partners can split profits based on contribution, effort, or any arrangement they agree to—not necessarily equal shares.
Minimal Administrative Burden
No annual reports to file with the state, no board meetings required, no corporate formalities to maintain.
The Real Disadvantages (That Destroy Businesses)
Here’s where general partnerships become dangerous for most entrepreneurs.
Unlimited Personal Liability for All Partners
This is the killer. Each partner is personally liable for ALL business debts and legal issues—not just their proportional share.
Real-world disaster scenario: Your partner causes a car accident while making business deliveries. The lawsuit for $500,000 can come after both partners’ personal assets—your house, savings, everything—even though you weren’t involved.
Joint and Several Liability
This legal concept means creditors can go after any partner for the full amount of business debts. If your partner disappears or goes bankrupt, you’re 100% responsible for all partnership obligations.
Partner Actions Bind the Partnership
Any partner can typically sign contracts, take on debt, or make business decisions that legally bind all partners. Your partner’s bad judgment becomes your financial responsibility.
Difficult to Scale or Exit
Want to bring in investors? Sell the business? Bring on new partners? These become incredibly complicated without formal business structure.
Credibility Issues
Banks, major clients, and vendors often prefer working with formal business entities. “Smith & Jones General Partnership” doesn’t carry the same weight as “Smith & Jones LLC.”
General Partnership vs. Multi-Member LLC: The Real Comparison
This is where most people get confused. Let me break down the actual differences:
| Factor | General Partnership | Multi-Member LLC |
| Formation Cost | $0 | $50-500 (varies by state) |
| Personal Asset Protection | None | Complete |
| Tax Treatment | Pass-through | Identical pass-through |
| Partner Liability | Unlimited for all debts | Limited to business assets |
| Administrative Requirements | Minimal | Moderate (annual reports) |
| Credibility with Banks/Clients | Limited | Professional |
| Flexibility for Growth | Restricted | Unlimited |
| Ease of Adding/Removing Owners | Complex | Straightforward |
The bottom line: Multi-member LLCs offer identical tax benefits with complete asset protection and professional credibility, typically for less than $500 in formation costs.
How to Start a General Partnership (If You’re Absolutely Sure)
If you’ve weighed the risks and still want to proceed, here’s how to do it properly.
Step 1: Business Planning and Partner Selection
Choose partners carefully—you’re betting your financial future on their judgment.
Key planning elements:
- Define each partner’s role and responsibilities
- Determine ownership percentages
- Establish capital contribution requirements
- Agree on profit/loss distribution
- Set decision-making processes
- Plan for dispute resolution
Critical partner discussions:
- What happens if a partner wants out?
- How do you handle partner disability or death?
- Who can make binding business decisions?
- How do you resolve deadlocks?
Step 2: Draft a Partnership Agreement (Absolutely Essential)
This is non-negotiable. Without a written partnership agreement, state default laws govern your partnership—and they’re rarely what partners actually want.
Essential agreement provisions:
- Partner names and ownership percentages
- Capital contributions and distribution methods
- Management responsibilities and decision-making authority
- Procedures for adding or removing partners
- Dispute resolution mechanisms
- Dissolution and exit procedures
- Buy-sell provisions for departing partners
Pro tip: Don’t use generic online templates for partnerships. The stakes are too high. Have an attorney draft or review your agreement.
Step 3: Choose a Business Name and File DBA
General partnerships can operate under the partners’ names (“Smith and Jones”) or file for a DBA (Doing Business As) name for better branding.
DBA filing process varies by state:
- Some states file with the Secretary of State
- Others file with county clerks
- A few states require newspaper publication
- Fees typically range from $10-100
When you need a DBA:
- Opening business bank accounts
- Professional branding and marketing
- Entering into contracts under the business name
- Building business credit
Step 4: Obtain Federal EIN (Required)
Unlike sole proprietorships, general partnerships MUST get an EIN from the IRS to file annual partnership returns.
How to get an EIN:
- Visit IRS.gov and complete the online application
- Receive your EIN immediately upon approval
- Keep the confirmation letter for business records
- Use the EIN for banking, taxes, and business contracts
Step 5: Research License and Permit Requirements
General partnerships need the same licenses as any other business structure.
License levels to research:
- Federal: Required for specific industries (firearms, alcohol, transportation)
- State: Professional licenses, industry-specific permits
- Local: City and county business licenses, zoning permits
Common licensed partnership businesses:
- Construction and contracting
- Food service and restaurants
- Healthcare and professional services
- Real estate and financial services
- Childcare and education
Step 6: Set Up Business Banking and Records
Business bank account requirements:
- Partnership agreement signed by all partners
- EIN confirmation letter
- DBA filing (if applicable)
- Photo ID for all partners
- Initial deposit
Essential record-keeping:
- Partnership tax returns (Form 1065) for past three years
- Individual partner tax information (K-1s)
- Financial statements and profit/loss records
- Partnership agreement and amendments
- Business licenses and permits
- Banking and financial documents
Tax Obligations for General Partnerships
Understanding partnership taxation is crucial for compliance and planning.
Federal Tax Requirements
Form 1065: Annual informational return showing partnership income, expenses, and distributions
Schedule K-1: Issued to each partner showing their share of profits/losses
Personal Returns: Partners report their share on individual Form 1040
Self-Employment Tax: Partners pay SE tax on their share of partnership earnings
State Tax Considerations
Income tax: Most states require partnership returns
Sales tax: Required if selling taxable goods or services
Employment taxes: Needed if hiring non-partner employees
Annual fees: Some states charge annual partnership fees
Quarterly Estimated Taxes
Partners must make quarterly estimated payments if they expect to owe $1,000 or more in taxes for their partnership income.
When General Partnerships Make Sense (Rare Cases)
Based on my experience, general partnerships work best for:
Professional practices transitioning to LLPs eventually
Family businesses with deep trust and shared liability comfort
Short-term projects with minimal liability exposure
Bootstrapped startups planning to restructure within 6-12 months
Even then, most of these situations benefit more from LLC structure.
Converting from General Partnership to LLC
Most partnerships I work with eventually outgrow this structure. The conversion process isn’t simple—you’re essentially shutting down one business and starting another.
Conversion steps:
- Form a new LLC in your chosen state
- Transfer partnership assets to the LLC
- Assign partnership contracts to the LLC
- Update banking, licensing, and vendor relationships
- Notify the IRS of the business structure change
- File final partnership tax return
- Update all marketing materials and legal documents
Tax implications: The conversion may trigger taxable events, so consult a tax professional before proceeding.
State-Specific Partnership Requirements
While most states treat general partnerships similarly, a few have unique requirements:
Delaware, Hawaii, Louisiana: Require state registration for general partnerships
Most other states: No registration required, but DBA filing may be needed
Texas, California: Have specific publication requirements for partnerships
Check your specific state’s requirements—partnership laws vary more than you might expect.
My Honest Recommendation for Most Business Partners
After working with hundreds of multi-owner businesses, here’s my straight advice: skip the general partnership and form an LLC instead.
Why LLCs make more sense for most partnerships:
- Identical tax treatment to general partnerships
- Complete personal asset protection for all members
- Professional credibility with banks and clients
- Easier to add investors or sell the business
- Clear legal framework for member disputes
- Simplified compliance compared to corporations
When general partnerships actually make sense:
- You’re truly testing a business concept short-term
- You’re absolutely bootstrapping and can’t afford LLC fees
- You’re planning to incorporate as a C-Corp within months
- You’re in a professional practice that will become an LLP
Critical Partnership Mistakes That Cost Money
After years of fixing partnership problems, here are the disasters I see repeatedly:
❌ Operating without a written partnership agreement (state default laws rarely match partner intentions)
❌ Not clarifying decision-making authority (leads to deadlocks and disputes)
❌ Ignoring buy-sell provisions (creates problems when partners want out)
❌ Mixing personal and business finances (destroys any limited liability arguments)
❌ Not planning for partner death or disability (can force business dissolution)
❌ Assuming equal partnership means equal work and responsibility
The Bottom Line on General Partnerships
General partnerships are easy to start but come with unlimited liability that can destroy your personal financial security. For most business partners, the minimal additional cost of forming an LLC provides identical tax benefits with complete asset protection.
My recommendation: Unless you’re in one of the rare situations where partnerships make sense, spend the extra few hundred dollars to form an LLC. The asset protection alone is worth far more than the formation cost, and you’ll project a more professional image from day one.
If you’re absolutely committed to starting a partnership, invest in proper legal documentation and understand that you’re personally guaranteeing all business obligations with your personal assets.
Ready to structure your multi-owner business the right way? Whether you choose partnership or LLC structure, make sure you understand the legal and financial implications for your specific situation. The business structure decision affects every aspect of your operations, taxes, and personal liability exposure.
Questions about choosing the right structure for your business partnership? I’ve helped hundreds of business partners make this exact decision based on their industry, growth plans, and risk tolerance. The right choice depends on your specific circumstances and long-term goals.