General Partnership

A general partnership is a relationship between two or more people to do business together. Each person contributes money, property, labor, or skill, and shares in the profits and losses of the business.

How it’s Formed: A partnership is automatically created when one or more people/companies start conducting business. A contract can be used, but is not necessary.

How it’s Taxed: Each partner reports their share of the business’s income or losses on their personal tax return. This is called “pass-through” taxation because the profits and losses of the business pass through to the partners’ personal tax return. The partnership must also file an annual information return to report the income, deductions, gains, losses, etc., from its operations, but it does not pay taxes. All general partners are required to pay self-employment taxes (Social Security and Medicare) on income distributions from the business.

NOTE: Without a contract, partners share in profits and losses equally. A contract can specify how much each partner shares in those profits and losses.

Key Benefits

  • Very easy to set up; no registration or contract needed (though, it’s generally a good idea to have a basic contract setting out how profits and losses will be split between the partners).

Key Downsides:

  • Each partner is personally liable for debts, obligations, and legal issues incurred by the business.
  • Each partner has authority to bind the business by entering into deals and agreements on behalf of the business. This can lead to friction with other partners, especially when the other partners are personally liable for those commitments.