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 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.