A Guide to General Partnerships: What They Are and How to Start One
A general partnership is a simple and flexible way for two or more people to own and operate a business together. Unlike corporations or LLCs, a general partnership is an unincorporated entity, meaning there are fewer formalities involved in setting one up. However, it also comes with certain risks and responsibilities that business owners should consider before moving forward.
If you’re thinking about starting a general partnership, this guide will walk you through what it is, its pros and cons, and how to set one up properly.
What Is a General Partnership?
A general partnership is a business structure in which two or more individuals share ownership, including profits, losses, and responsibilities. Unlike corporations or LLCs, general partnerships do not require formal registration with the state to be legally recognized.
Key Features of a General Partnership:
✔ Simple to set up – No formal registration is typically required.
✔ Shared management – All partners contribute to running the business.
✔ Pass-through taxation – Profits and losses are reported on each partner’s personal tax return.
✔ Unlimited liability – Each partner is personally responsible for the business’s debts and obligations.
A general partnership isn’t the right fit for everyone, but it can be a great choice for small businesses, freelancers, and professionals who want to work together without the complexities of forming an LLC or corporation.
How to Start a General Partnership
Setting up a general partnership is relatively easy, but taking the right steps from the beginning can help prevent legal and financial problems down the road. Follow these steps to properly form your partnership:
Step 1: Choose a Business Name
Every general partnership needs a name. The business name will be used for tax documents, marketing, bank accounts, and legal paperwork.
In many cases, unregistered general partnerships use the last names of the partners (e.g., “Smith & Johnson Consulting”). However, if you want a more unique business name, you can register a “Doing Business As” (DBA) name with your state or county.
âś” The DBA name must be distinguishable from other businesses in your state.
âś” Registering a DBA allows you to brand your business under a professional name instead of personal names.
Step 2: Create a Partnership Agreement
While not legally required in most states, drafting a Partnership Agreement is highly recommended. This document outlines:
✔ Each partner’s responsibilities
âś” Profit and loss distribution
âś” Decision-making authority
âś” Dispute resolution procedures
âś” Exit strategies and ownership transfer rules
Without a written agreement, your partnership will default to state laws, which may not align with your business goals. A well-crafted agreement reduces conflicts and ensures clarity for all partners.
Step 3: Obtain an EIN (Employer Identification Number)
Even though a general partnership is not taxed separately, the IRS requires partnerships to obtain an EIN (Employer Identification Number) for tax purposes. This number is used to:
âś” File business tax returns
âś” Hire employees (if applicable)
âś” Open a business bank account
You can apply for an EIN for free through the IRS website.
Step 4: Obtain the Necessary Licenses and Permits
Even though general partnerships don’t require formal registration, most businesses still need licenses and permits to operate legally. The specific requirements depend on your industry and location.
Common business licenses and permits include:
âś” General business license (required in some states and cities)
âś” Professional or industry-specific licenses (e.g., contractors, healthcare, food service)
âś” Sales tax permit (for businesses that sell taxable goods)
Check with your local and state government agencies to ensure your partnership has all the necessary permits.
Step 5: Open a Business Bank Account
Keeping personal and business finances separate is essential for financial clarity. A business bank account allows you to:
âś” Keep track of income and expenses
âś” Accept payments professionally
âś” Avoid mixing personal and business funds
Most banks require an EIN and a Partnership Agreement to open a business account.
Pros and Cons of a General Partnership
While general partnerships offer simplicity and flexibility, they also come with certain risks. Here’s a breakdown of the pros and cons to help you decide if this structure is right for you.
Pros of a General Partnership
✅ Easy and inexpensive to start – No formal registration required in most states.
âś… Pass-through taxation – Profits and losses pass directly to the owners’ tax returns, avoiding corporate taxes.
✅ Shared management – Work and responsibilities are split among partners.
✅ Flexible structure – No rigid corporate formalities or board of directors.
Cons of a General Partnership
❌ Unlimited personal liability – Each partner is personally responsible for business debts and lawsuits.
❌ Potential for partner disputes – Without a clear agreement, disagreements can become problematic.
❌ Difficult to transfer ownership – Unlike corporations, transferring partnership interests can be complex.
❌ Limited ability to raise capital – Investors may prefer corporations or LLCs for funding opportunities.
Because of the unlimited liability, some business owners choose to form an LLC instead to protect their personal assets.
Examples of General Partnerships
Many types of businesses can be structured as a general partnership, including:
✔ Professional Services – Consulting firms, law firms, accounting firms
✔ Retail and Sales – Online stores, boutique shops, pop-up markets
✔ Hospitality – Restaurants, catering businesses, food trucks
✔ Creative Ventures – Graphic design studios, marketing agencies
✔ Business Consulting – Coaching, strategy development, and advisory services
General partnerships work best for businesses where partners bring complementary skills—for example, one partner may focus on customer relations while another handles finances and operations.
General Partnership FAQs
What’s the Difference Between a General Partnership and an LLC?
Both general partnerships and LLCs offer pass-through taxation, meaning business profits are reported on the owners’ personal tax returns. However, an LLC provides greater liability protection, shielding the owners’ personal assets from business debts and lawsuits. Additionally, LLCs typically require more formal registration and compliance requirements compared to general partnerships.
How Do General Partnerships Differ From Other Business Entities?
General partnerships are often less formal than other business structures, requiring minimal paperwork to establish. Unlike corporations and LLCs, general partnerships do not provide personal liability protection, meaning owners can be held personally responsible for business debts. However, general partnerships may also have fewer tax obligations and administrative requirements than other entity types.
Why Should I Choose a General Partnership?
A general partnership can be a great choice for those looking for a simple and cost-effective way to start a business with one or more partners. It allows for shared management responsibilities without the complexities of forming an LLC or corporation. However, because general partnerships do not offer liability protection, it’s important to consult with a legal or financial professional to determine if this structure is right for you.
Do General Partnerships Need an EIN?
Yes. All general partnerships must obtain an EIN (Employer Identification Number) from the IRS for tax and business reporting purposes.
Can Someone Be a Partner in Multiple General Partnerships?
Yes. Unless a partnership agreement specifically restricts participation in other business ventures, a person can be a partner in multiple general partnerships simultaneously. However, it’s important to review any contractual obligations to avoid conflicts of interest.
Final Thoughts
A general partnership is a straightforward and low-cost way for two or more people to start a business together. However, because partners share unlimited liability, it’s important to consider the risks before choosing this structure.
If you’re forming a general partnership, make sure to:
âś” Choose a business name
âś” Create a written Partnership Agreement
âś” Obtain an EIN for tax purposes
âś” Secure business licenses and permits
âś” Open a business bank account
While a general partnership can be a great starting point, some business owners later choose to convert their partnership into an LLC or corporation for additional liability protection. If you’re unsure which structure is best for your business, consult with a business attorney or tax professional.