General Partnerships
A partnership is formed when two or more persons agree to carry on a business together. This agreement can be written or oral. A general partnership is formed when two or more people intend to work together to carry on a business activity. No local or state filings (other than appropriate tax returns) are required to create this type of partnership. This is different than a corporation, which does not come into existence until Articles of Incorporation have been filed with the Secretary of State.
The distinguishing feature of a partnership is the unlimited liability of the partners. Each partner is personally liable for all of the debts of the partnership. That includes any debts incurred by any of the other partners on behalf of the partnership. Any one partner is able to bind the partnership by entering into a contract on behalf of the partnership. If Jackson and Wilson are partners, and Wilson signs a contract on behalf of the partnership, Jackson will be personally liable for the full amount. This is true regardless of whether Jackson authorized the contract or whether he even knew of its existence. This feature of unlimited liability contrasts with the limited liability of the owners of a corporation. As discussed previously, when a contract is entered into on behalf of a corporation, the owners are not personally liable for its performance.
Because each of the partners has unlimited personal liability, a general partnership is the single most dangerous form for conducting one’s business. Not only is a partner liable for contracts entered into by other partners, each partner is also liable for the other partner’s negligence. When two or more physicians or other professionals practice together as a partnership, each partner is liable for the negligence or malpractice of any other partner.
In addition, each partner is personally liable for the entire amount of any partnership obligation. For example, Dr. Smith may be one of ten partners in a medical partnership, but he is not responsible for only 10 percent of partnership obligations. He is responsible for 100 percent-even though he owns only a 10 percent interest. If Dr. Smith’s other partners are unable to pay their respective shares, he must pay the entire amount.
General Partnership versus LLC
Because of the joint and several liabilities of general partners, the level of business risk is increased dramatically by this form of business organization. Since most of these risks are effectively eliminated with an LLC, the general partnership seems to be a legal relic. It is now used primarily in situations where use of an LLC to conduct business (by physicians and other professionals) is not permitted by state law. If a general partnership cannot be converted into a limited liability entity (LLC, corporation or limited partnership) because of state law or obstinate partners, an individual partner might be able to transfer his partnership interest ito an LLC and have the LLC substituted in as a replacement general partner. If permitted and agreed to by the other partners, that strategy may insulate the individual from partnership liabilities.
For more on choosing the proper business entity
As with any high risk business, individual partners should explore whether asset protection planning to protect personal assets from business liabilities would be a sensible strategy to mitigate the risks.
