General Partnership

A general partnership is the basic multi-owner business form under state law: two or more people carrying on a business together as co-owners, each with authority to bind the business and each personally liable for its obligations. Its defining feature is that nothing has to be filed. Section 202(a) of the Uniform Partnership Act provides that "the association of two or more persons to carry on as co-owners a business for profit forms a partnership, whether or not the persons intend to form a partnership." The word "general" is not in the statute, which simply says "partnership"; it is the contrastive label people reach for once limited partnerships and limited liability partnerships exist as alternatives, and it means the plain version with no liability shield.

Because the form arises from conduct rather than paperwork, the interesting question is usually whether one exists at all. The uniform act supplies tests. Co-ownership of property does not by itself make a partnership, even where the co-owners split the profits the property produces, and neither does sharing gross returns. What does raise a presumption is sharing net profits: a person who receives a share of a business's profits "is presumed to be a partner in the business," unless the payment was really something else. The act lists the exceptions, and they are the situations that most often look like profit sharing without being it: payment of a debt in installments, wages or compensation to an employee or an independent contractor, rent, a retirement or health benefit to a retired or deceased partner or their beneficiary, interest or another charge on a loan even where the amount varies with profits, and payment for the sale of goodwill or other property by installments. A revenue-share arrangement written casually can land inside the presumption rather than inside one of the exceptions, and the consequence is not bookkeeping. It is personal liability.

Section 306(a) states the liability rule: "all partners are liable jointly and severally for all debts, obligations, and other liabilities of the partnership unless otherwise agreed by the claimant or provided by law." Joint and several means a creditor can pursue any single partner for the entire obligation rather than that partner's share of it, leaving that partner to seek contribution from the others, who may or may not be able to pay. The exception is the part most often misread. "Unless otherwise agreed by the claimant" means the creditor has to agree to the limit. A clause in the partnership agreement saying each partner is responsible for half is enforceable between the partners and does nothing to the creditor, who was never a party to it.

Two narrower rules soften the edges. A person who becomes a partner "is not personally liable for a debt, obligation, or other liability of the partnership incurred before the person became a partner," so joining an existing firm does not import its history into the new partner's personal balance sheet, though the capital they contributed is now partnership property and stands behind those debts like everything else the partnership owns. And the exposure runs through actions as well as contracts: because each partner is an agent of the partnership for its ordinary business, a contract one partner signs in the usual course, or a wrong one partner commits in the course of the business, reaches all of them.

The way out is not an agreement but an election. A general partnership can become a limited liability partnership by a partner vote and a filing, after which the partners are no longer personally liable for the firm's obligations simply by being partners. Forming a limited partnership, a limited liability company or a corporation instead are the other routes, each with its own filing. What none of them is, is automatic: the general partnership is what two people who start a business together already have, and the alternatives are things they have to go and do. The uniform act itself is a model drafted by the Uniform Law Commission, so the operative rules for any particular partnership are those of the state whose law governs it.

1. Two or more people carry on a business together for profit. No filing, no written agreement and no intention to create a partnership is required for one to exist.

2. Each partner is an agent of the partnership for the ordinary course of its business, so any of them can bind it to contracts.

3. Profits, losses and management rights follow the partnership agreement if there is one, and the statute's default rules if there is not.

4. Creditors can reach any partner personally for the whole of a partnership debt, and that partner's remedy is to seek contribution from the others.

5. Changing the exposure requires a change of form, by electing limited liability partnership status or by organizing a different entity, not by an agreement among the partners.

Suppose two people open a coffee shop together, splitting everything down the middle. They never file anything with the state. One of them signs a three-year lease for the premises at $4,000 a month and orders $60,000 of equipment on credit. Eighteen months in, the business fails owing $72,000 on the lease and $40,000 on the equipment, a total of $112,000, and the partnership's remaining assets are worth $18,000. Their internal agreement to split everything 50/50 does not bind either creditor. The equipment supplier can sue whichever partner looks more collectible for the full remaining $40,000, and if that partner pays it, their claim for $20,000 from the other is a separate fight they have to win and then collect on. Had the two elected limited liability partnership status before the debts were incurred, neither would have been personally liable for them solely as a partner.

Pros

• Nothing to form. Two people can start operating immediately without filings, fees or a registered agent.
• No entity-level tax return separate from the pass-through reporting the tax code already requires of any partnership.
• Management is flexible by default, and a written partnership agreement can reshape the economics and the decision rights almost however the partners want.
• Credibility with customers and suppliers does not depend on a filing, so a venture can be tested before anyone commits to an entity.

Cons

• Unlimited personal liability, joint and several, for everything the business owes.
• Each partner can bind the others. One partner's contract or conduct in the ordinary course of business reaches every partner's personal assets.
• The protective agreement does not protect. Splitting liability among the partners has no effect on a creditor who did not agree to it.
• It can form by accident, which means people end up personally liable for a business they thought was a loose collaboration.
• Continuity is fragile. A partner's departure, death or bankruptcy can trigger dissolution provisions the partners never negotiated because they never wrote an agreement.