A general partnership is a type of legal structure where two or more individuals co-operate or form an association in order to establish a business, for the purpose of making a profit as a group. The incorporation process is also known as
company formation. Profits are usually distributed equally between the partners, who are also equally personally liable for the entire company. However, the general partnership dissolves if one of the partners decides to withdraw from the shared business.
Even though general partnerships offer some tax exemptions, it should be pointed out that they have one major disadvantage in terms of personal liability. In a general partnership, the actions of one partner are automatically considered to be endorsed by the others, making each partner personally liable for the others’ actions. The liability of partners in a general partnership can be summed up as follows:
- Each partner is responsible for his or her own actions.
- Each partner is responsible for the actions of all other partners.
- Each partner is responsible for the actions of the partnership’s employees.
Consequently, we would strongly recommend that you think twice and perform due diligence on your potential business partner(s). A good alternative to a general partnership may be a limited partnership or a limited liability partnership.
Owners of a general partnership
The owners of a general partnership are called 'the general partners', and they hold unlimited liability for the company. They are deemed to be partners after the agreement to incorporate a company has been finalised. Each partner has the power to conduct business on behalf of the company without permission or authorisation from the other general partners. General partners must always take tax planning into consideration, and it is highly advisable that they do not take any substantial risks on behalf of the company, since their personal assets would be put at risk.
Functions of a general partnership
General partnerships are formed for various reasons and they have certain legal implications, for example for company management procedures, profit-sharing, responsibility for partners’ debts, etc. Profits are always shared equally among all of the company’s partners, and they have absolute individual authority to manage and run the business. Moreover, all partners are considered to be liable if one or more of them have dealings with a third party, as any one partner can enter into and perform agreements on behalf of the partnership as a whole.
Benefits of a general partnership
Like any other legal entity, general partnerships have their pros and cons. However, general partnerships hold several benefits that can speed up the company formation process as well as increasing the efficiency and longevity of the business. Perhaps the biggest advantages of general partnerships are simplified taxes and reduced paperwork. All profits and losses are handled by the partners, and forming a general partnership requires less time and less paperwork than other types of company. The paperwork is usually very simple and company formation should be completed within the jurisdiction in which the agreement was issued.
General vs limited partnerships
As discussed above, a general partnership is a legal entity formed by agreement between two or more partners for the purposes of company formation. A limited partnership is another legal structure, which has several similarities to a general partnership but various differences as well. Partners in both general partnerships and limited partnerships have total freedom in terms of managing their company, and the same tax benefits. However, the liability imposed by a general partnership is usually very risky, as responsibility is unlimited, while limited partnerships offer a certain degree of protection for the partners’ personal assets by limiting their personal liability to the value of their interest in the business.
Top three jurisdictions
The effectiveness and efficiency of offshore jurisdictions change from time to time depending on various contributing factors. The Bahamas, Panama and Switzerland have always been major centres for company formation. Despite changes in their banking laws, Switzerland and the Bahamas are still strong contenders; however, the strongest is undeniably Panama, since its government has been stable for a long period of time and is firmly invested in the offshore banking sector.
If you have any questions about incorporating a general partnership, or about tax planning, please do not hesitate to contact us.