By: Serge Filatov
Working as a business attorney in Silicon Valley, which some consider the start-up capital of the world, I have seen my fair share of different business structures . One structure that people form (most without even realizing it) is a general partnership.
A general partnership is formed when two or more people carry on a business for profit. Interestingly, people do not need to intend to form a general partnership. Simply carrying on a business together is enough to create it. And when that happens, all of a sudden an entire body of law applies to the relationship of the owners of the business – some of whom probably don’t even realize what has happened.
Because two or more people can unknowingly create a general partnership, let’s get into some specifics about what it means to have such a business structure.
One of the big problems of having a general partnership, and a reason I counsel most people away from having this type of entity, is that you are personally responsible for the liabilities of the partnership. This personal responsibility occurs even if your partner, but not you, creates the liability. If your business partner purchases $100,000 in product for the partnership but the partnership cannot afford it, you, personally, will be liable for any amount that is owed. You will be liable even if your partner did not tell you about the purchase of the product. The bottom line is that this entity structure will not protect your personal finances so you are completely exposed as an owner.
Although the lack of liability protection is a major concern, the general partnership structure does have some benefits. It is easy to form and easy to manage. In California, a general partnership can file a “Statement of Partnership Authority”, but this is optional. In fact, no state filing is required in order to have a lawful entity. Moreover, unless there is a partnership agreement between the partners which has language to the contrary, the partners will each have full managerial powers over the business. The ease of formation, control, and lack of corporate formalities may make the general partnership seem like a tempting business structure. However, the lack of protection from personal liability for the debts of the business will often lead a business to choose another form of entity.
The information appearing in this blog does not constitute legal advice or opinion. Such advice and opinions are provided by the firm only upon engagement with respect to specific factual situations. Specific questions relating to this article should be addressed directly to Strategy Law, LLP.