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A partnership is one type of business structure in which two or more business partners carry on business with a common view to profit. Partnerships are a common type of business structure due to the relative simplicity of starting and operating a partnership.

In Australia, different laws apply depending on the state your partnership operates in. However, there are generally three main types of partnerships: general, limited, and incorporated limited partnerships. This article will outline all the foundational information you should know to understand the legal term ‘general partnership’. 

What is a General Partnership? 

A general partnership is one type of partnership where all partners have active management and control. This includes all partners being subject to unlimited liability for the business’ debts and obligations.

For example, consider that Susan and Jim decide to open a homeware store together. Therefore, by owning and operating the store together, Susan and Jim are general partners. As general partners, they each must be involved in the business. For example, Susan might be responsible for taking care of stock while Jim might oversee the store management. In addition, Jim and Susan will split the business profits between them and share any debts they incur.

Advantages of a General Partnership

Simplicity 

One key advantage of all partnerships is simplicity. A general partnership is inexpensive and straightforward to establish when compared to the formation of a company. In addition, these partnerships also do not pay tax. Instead, all income and losses pass through to the partners’ own personal tax returns, adding to the ease of operating a partnership.

Partnership Agreement 

Most partnerships establish the terms of the business through a partnership agreement, which is a legal document that will protect the interests of all partners. In a partnership where all partners have active management and control over the business, they can use the partnership agreement to customise the business structure.

For instance, this might include modifying:

  • how the partnership will be established;
  • how profits will be distributed; and
  • each partner’s roles and responsibilities.

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Disadvantages of a General Partnership 

Unlimited Liability 

The key downside is that partners face unlimited liability. That is to say, unlike other partnership structures where liability can be limited, general partnerships do not have this same benefit. Consequently, all partners will be liable for the actions of the other partners, including any debts that they incur. Therefore, this can put the partners’ own assets at risk.

Disputes 

In a general partnership, any dispute about the operation of the business might cause the business to fail. That is because each partner will have an active role in the management and control of the business. Where opinions differ, a minor dispute has the potential to be detrimental to the business. Fortunately, partnership agreements will often outline dispute resolution processes to prevent this.

Is a General Partnership Suitable for Me?

When you are entering a business with one or more persons, a general partnership is a great way to start your business due to its relative ease and inexpensive nature. Therefore, ensuring you and your potential partners have the same vision for the business and trust one another will be the key to a successful partnership. Additionally, a partnership agreement is also recommended for partnerships, as it will set out how the partnership will run.

However, as your business grows and takes on more risk, it will become more important to consider limiting your liability, such as through incorporating. If you are unsure if a partnership is right for your business, you should seek legal advice. You should also seek financial advice as the tax implications are different for partnerships than other structures such as companies.

Key Takeaways

A partnership is a kind of business structure in which two or more business partners carry on business with a common view to profit. There are three types of partnerships, including general, limited and incorporated limited. In a general partnership, all partners:

  • have active management and control over the business; and
  • are subject to unlimited liability for the business’ debts and obligations.

If you need help with a general partnership, our experienced business lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.

Frequently Asked Questions 

What is a general partnership?

A general partnership is one type of partnership where all partners have active management and control over the business. This includes all partners being subject to unlimited liability for the business’ debts and obligations.

What are the advantages and disadvantages of a general partnership?

One key advantage of all partnerships is simplicity. A general partnership is simple and inexpensive to establish when compared to other business structures. Further, most partnerships establish the business terms through a partnership agreement, which can be customised to suit the needs of the general partnership. On the other hand, the key downside to a general partnership is that partners face unlimited liability, making all partners liable for the actions of the other partners, including any debts incurred.

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