Business Structures from A to Z: Phase 1, The Core Entities

The General Partnership: The Risky Handshake

Our previous article covered the sole proprietor. But often, a business starts with two or more people—perhaps two friends with a good idea. If they start a business together without filing as a corporation or an LLC, what is their legal structure?

Just like the sole proprietorship, the General Partnership is the 'automatic' structure for two or more people doing business together. You don't need to sign any papers; the moment you and your partner begin working together, you have automatically formed a General Partnership.

This structure shares the same advantages as a sole proprietorship—it's easy and cheap to start—and the same major disadvantage: Unlimited Liability. However, in a partnership, this disadvantage is many times worse.

The Core Disadvantage: Joint and Several Liability

This is a legal term every partner must understand. "Joint and several liability" means that each partner is 100% responsible for the entire debt of the business, regardless of which partner incurred the debt.

An Example:

Let's say you and your friend Sarah decide to start a catering business together. You shake hands and begin working. You are now a General Partnership. One day, Sarah is making a delivery and accidentally causes a car accident. The damages total $500,000.

Here's the problem:

• Even though you were not driving the car
• Even though you did not cause the accident
• Even though the business might only be 50% yours

You are personally liable for the entire $500,000.

If Sarah doesn't have the money, the injured party can come after all your personal assets—your house, your savings, everything you own—to collect the full debt.

Why This is Worse Than a Sole Proprietorship

In a sole proprietorship, you control all business decisions and actions. You are only liable for your own mistakes.

In a General Partnership, you are liable not only for your own mistakes but also for every mistake your partner makes. You have essentially given your partner the legal power to destroy your financial life, even if you did nothing wrong.

The Trust Problem

Even if you trust your partner completely:

• People make mistakes
• Circumstances change
• Partners can become careless or reckless
• Business pressures can lead to poor decisions

No matter how much you trust someone, it is never wise to give them unlimited legal power over your personal assets.

State Requirements for General Partnerships

Like sole proprietorships, General Partnerships have minimal formation requirements but still must comply with state and local regulations:

Business Name Registration

If you operate under a business name different from the partners' legal names, you must register:

• In New York: File a DBA (Doing Business As) Certificate at the County Clerk's Office
• In New Jersey: File a Trade Name Registration with the NJ Division of Revenue and Enterprise Services

State Tax Registration

New York:

• Register with the NY State Department of Taxation and Finance if collecting sales tax or hiring employees
• Obtain a Certificate of Authority

New Jersey:

• Register with NJ Division of Revenue (DORES) for a Business Registration Certificate (BRC)
• Register for sales tax with NJ Division of Taxation if applicable

Partnership Tax Returns

Unlike a sole proprietorship:

• A General Partnership must file an informational tax return (Form 1065) with the IRS
• Each partner receives a Schedule K-1 showing their share of profits/losses
• Partners report their share on their personal tax returns

The Better Alternative: Limited Partnerships and LLPs

Fortunately, there are better options:

Limited Partnership (LP)

• Has both "General Partners" (who manage and have unlimited liability) and "Limited Partners" (who invest but have limited liability)
• Requires formal filing with the state

Limited Liability Partnership (LLP)

• Protects each partner from the other partners' negligence and misconduct
• All partners can manage the business
• Requires formal state filing
• Popular among professional service firms (lawyers, accountants, etc.)

Limited Liability Company (LLC)

• Provides full liability protection for all members
• Flexible management structure
• Simpler than a corporation
• The most popular choice for small businesses with multiple owners

The Bottom Line

Never operate as a General Partnership if you can avoid it. The risks far outweigh the minimal convenience of not filing paperwork. The small cost and effort of forming an LLC or LLP is nothing compared to the devastating financial consequences that joint and several liability can create.

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Protect Your Partnership the Right Way

Don't put your personal assets at risk with an informal partnership. Form an LLC or LLP to protect each partner while maintaining flexibility in how you run your business.

Why Choose Keystone Filings?

• Service fees start at $0 - affordable protection for your partnership
• Expert guidance on LLC vs LLP vs other structures
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Form Your LLC Today and protect your partnership from unnecessary risk.

Questions about partnership structures? Schedule a free consultation with our business formation experts.

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This article is part of our "Business Structures from A to Z" series. Read about Sole Proprietorships or explore all our business formation resources.