What Are the Benefits of General Partnerships?

Are you intending to start a business with at least one other person? Will this person have an equal or substantial say in the business’ direction and an expectation of sharing in the business profits? If so, you are likely entering into a general partnership, even if you do not intend to. A general partnership emerges automatically when two or more individuals engage in a business venture with the purpose of sharing in the business’ profits. This article will explore the benefits of general partnerships in operating your business. 

What is a General Partnership?

A general partnership does not require you to formalise your business structure as with incorporating. Instead, a general partnership automatically arises when two or more people work together on a commercial venture to share in the business’ profits.

It is usually pretty clear when people engaged in business operate as partners rather than, say, as an owner and an employee. However, where it is unclear, the law has various ways to determine if two or more people acted as partners. 

What Should a Partnership Agreement Cover?

The law has various rules that automatically govern partnerships absent any express agreement. Put another way, it is almost always in the interests of you and your business partner’s interest to sit down and create a partnership contract that deals with things like:

• profit sharing;
• power to appoint new partners;
• capital contributions;
• resignations and terminations;
• decision-making powers; and
• salaries.

Rarely is this sufficient for most partnerships. Therefore, you should instruct a lawyer to advise you on any partnership agreement you and the other partners intend to create. Provided all the partners agree to the essential terms of the partnership agreement, the partnership can instruct a single solicitor. However, where you and the other partners need to negotiate essential terms such as profit sharing, you will need to each instruct your own legal adviser.

What Are the Benefits of a Partnership?

There are several benefits to operating a business as a general partnership. 

1. Flexibility

The nature of partnerships is that the partners are free to create a partnership agreement with whatever terms they would like. This gives partners far more flexibility than if they structured the business through a limited company. This is big cause company law creates certain obligations on the company and its directors that cannot be varied.

This is particularly advantageous when you are engaged in a business where all of these significant capital contributors will also have a role in the management of the business. In particular, partnerships are well-suited for professional service providers like: 

• lawyers;
• consultants; 
• accountants; and 
• tax advisers.

2. Confidentiality

Unlike incorporated business structures, including companies and limited liability partnerships, partnerships have very few disclosure obligations. This means you can keep arrangements contained in the partnership agreement confidential from the public. This preserves commercially sensitive information for reaching the public domain.

3. Risk Factors

There are certain risk factors inherent to partnership structures. Most notably, each partner is responsible for the partnership’s debts and obligations. Consequently, every partner’s assets can be used to meet any claims against the partnership’s business. It likewise means that each partner is responsible for the other partner’s negligent acts where the acts arise during the partnership’s business.

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Key Takeaways

General partnerships emerge automatically when two or more people engage and a commercial venture to share in the profits. Partnership agreements govern partnerships. Absent express agreement, the law implies standard partnership agreement terms binding the partnership. Often, these terms do not meet the circumstances of the partnership. For these reasons, it is vital to instruct a solicitor to advise on the drafting and execution of the partnership agreement. The key benefit of a general partnership is flexibility and confidentiality.

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