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What are the pros and cons of a general partnership?

On Behalf of | Oct 27, 2021 | Business And Corporate Law

You want to start a business in Michigan. You do not want to run it alone, but you also want to avoid the trouble and expense of setting up a complicated structure like a corporation or an LLC. A general partnership is a structure in which you and one or more others start a business together, sharing in management duties, profits and losses.

There can be benefits to forming a general partnership. However, there can also be drawbacks. If you start a partnership with one or more friends or family members, the stress and difficulty involved in running the business may take a toll on your personal relationship. It is better to have a clear idea of all that could happen, good and bad, before committing to starting a partnership. All Business explains a few of the pros and cons.

PRO: Minimal paperwork

You may need to draft a partnership agreement explaining each partner’s responsibilities and file it with the county in which you do business in order to start your general partnership. However, that may be the extent of the paperwork that you need to fill out. Compared to starting a corporation, creating a general partnership is much easier and also less expensive.

CON: Management issues

Any personal finances that you or your partner(s) spend on the business or invest in it then become the property of all the partners. Conflict can arise over reimbursement for one partner’s contributions.

PRO: Tax benefits

Profits and losses from a general partnership pass through to each individual partner. You will each report your share on your personal tax return, but the business itself does not pay income taxes.

CON: Legal liability

A partnership is “one for all and all for one.” That means that all partners bear responsibility for business decisions, even those made unilaterally. It also means that you and your partners are personally liable for any fines, fees or debts that arise as a result of a poor business decision. In other words, if the business assets are not enough to cover the obligation, you may need to pay for it out of your personal finances. This is different from LLCs or corporations that protect your personal assets with limited liability.

The information in this article is not intended as legal advice but provided for educational purposes only.