Starting your own business takes a little more planning that having a great idea and opening the company’s doors. It looks easy to set up a partnership with your spouse, siblings or friends. In reality, the process is a lot more complicated and presents significant danger.

Forming a general partnership with your friends and family may not be the best form of operation for your unborn enterprise. There are better business structures that shield you from undue risk.

First of all, general partners are legally responsible for the debts of the business. Individual partners aren’t protected against bankruptcy liabilities in case the business fails. What this means is yours and your partners’ assets can be seized to satisfy the business’ creditors. You need to understand these ramifications and draw up a partnership agreement outlining the partners’ individual responsibilities and financial rewards if there are any.

Secondly, any partner can sign off on a financing agreement, for example, and the contract is legally binding on all the partners. In short, your brother-in-law’s bad business sense could cost you not only the business but also your home. A partner may also sign a contract without the other partners’ knowledge, taking the company in an undesired direction.

General partnerships suffer from the same financial risks of a sole proprietorship owned and operated by a single person. The law doesn’t recognize a general partnership as being a separate entity responsible for its own debts. In some ways, your business is regarded as an underage child for whom you hold total responsibility. If your business is involved in litigation, you could lose personal assets such as your vehicle and home to satisfy the terms of an adverse judgment.

General partnerships often break up for a variety of reasons. When this happens, default guidelines apply. The total value of the business is divided equally among the partners under the terms of the Uniform Partnership Act, recognized by most states. Unfortunately, this doesn’t always work in everyone’s best interests. It’s advisable to draw up your own partnership agreement that reflects the realities of your particular business and its dynamics.

Certain kinds of business organizations do just fine as a general partnership. For example, some types of real estate companies and professional-service firms lend themselves well to this form of business. On the other hand, writing a partnership agreement detailing how the assets, responsibilities and rewards of a company will be divided works in everyone’s best interests even if it’s a simple as a 50-50 split upon the business’ dissolution.

The drawbacks of general partnerships are apparent for the reasons outlined above. Forming a limited liability company, a LLC, gives all the partners better protection against personal financial risks. If you and your partners decide to form a general partnership anyway, draw up a detailed agreement specific to your organization to best protect everyone against excessive loss and to guarantee an equitable distribution of assets and future responsibility.


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