You create this structure by an agreement. It can be an oral agreement, but it should be in writing. To avoid unnecessary troubles, it is wise to use the aid of an attorney. The agreement should set forth the respective ownership interests of the partners, the extent of each partner’s investment in the business, and other important matters. With the coming of both limited liability companies and partnerships (see below), general partnerships seem to be growing obsolete.
Because so many terms must be plugged into the agreement—including the rights and obligations of each partner, what happens if a partner dies, and so forth—a partnership can be more complicated than it might initially appear. With so much to consider, it’s a good idea to have a lawyer advise you on the issues and to prepare and negotiate the agreement. Problems can arise when partners have differing views of how the business should operate or feel that one partner is doing more work than the other.
Although it is not taxed as a single entity, total profit and losses are tallied for the business in a general partnership. Each partner then files an individual tax return (using Schedule K-1) that includes the amount of his respective tax liability and is taxed accordingly. Setting up a retirement plan becomes complicated because if all partners can’t agree on the type of plan, it might be impossible to have a plan.
Each partner is personally responsible for all of the business liabilities of the partnership and even for the individual liabilities incurred by partners during the course of partnership activities. Each partner’s personal assets are potentially at risk. If a bill isn’t paid, you can be made to pay the entire amount if your partners are unable to pay their respective shares.
Partners contribute time, money, or property to receive equity interest. These contributions must be tracked and will have ramifications for each partner. Borrowing from banks or other lending sources is as problematic as for sole proprietors; personal collateral is often necessary.
In the general partnership agreement, partners can provide for the contingency of another’s death, incapacity, or desire to sell his equity. One option is a buy/sell agreement that can state that upon death, the dead partner’s heirs will receive the proceeds of a life insurance policy that has been taken out for the purpose of buying out the interest of the deceased partner. In return, the heirs will lose all rights, title, and interest in the partnership business.