General Partnership: How It Works, Pros, Cons

Innovative minds lead to innovative products. The ability to think and present something new in the market has always been awarded by the customers. The current pandemic era, of Covid-19, is a standing testimonial for this assertive affirmation. Who would have thought that a simple mask would make million dollars one day and become a necessity for months until this virus is wiped out from the Earth?

The changing life conditions have given an opportunity for many businesses to start - whether the owner is a sole proprietor or if the business is started in a General Partnership. In common man’s language, the partnership is when two or more individuals, join hands to carry out a particular business. In this, the partners’ sign a paper to share the profits and losses equally or according to the agreement depending on the percentage of stake they have invested in.

In partnership, there can be multiple types of partners which can be classified as follows -

1. Managing or Active Partner
2. Sleeping Partner
3. Partner by Estoppel
4. Minor Partner
5. Partner by Nominal
6. Outgoing Partner
7. Secret Partner
8. Partner in Profits Only
9. Limited Partner
10. Sub-Partner

4 Types of Partnership in Business

Now, as you have some basic understanding of partnership and read the names of types of partners, let us get to know what are the different types of business partnerships.

1. General Partnership
2. Limited Liability Partnership
3. Limited Partnership
4. LIC Partnership  

General Partnership is a partnership in which the business is owned by two or more people and they agree to run it as co-partners. If not stated in the agreement, then the partners have an equal share in the profits & losses. In case there is an economic turmoil in the business from one partner, then it is the duty of the second individual to save the company from debts. The partners will get their share as agreed in the agreement if they decide to split and part ways at any point of business.

Why have this kind of partnership? It has multiple positive reasons like -

1. Easy-to-establish
2. Flexible
3. Low-cost

The risks include liability on the partner’s might go up and there is a possibility of losing one’s personal asset.

LLP or Limited Liability Partnership is a type where neither of the partners would be considered responsible for loss in business due to debts or the partner’s actions. Here the risk is, even if you won’t be losing any of the personal assets, but there can be a legal case filed if either of the partners decides to drag the other into the court.

Limited Partnership is way structured than other partnerships. In this type of partnership, there would be both, limited partnership and general partnership.

In this type, there are certain limits on the limited partner -

1. They can only be investors
2. They do not have decision-making power
3. Their activities are limited and cannot be involved in business management
4. Limited partners need to be careful of their activities

In LLC Partnership, both the partners are known as members, Even if your personal assets in this type stand protected, the other partner can hold you liable for your wrong actions.

In this, the purpose is to reduce the financial burden on a partner’s savings to support his family, in case of any mishap or sudden illness/death occurring to the partner who recently died.

What is a General Partnership in Accounting?

From the accounting perspective, a general partnership can be considered as an unincorporated business that is run and handled by 2 or more people. In this case, both the partners have an equal share in business profits, will pay for the debts and have a fare control over the business.

In such type of business, the 2 or more partners can start their venture without any official declaration, approval of paperwork or any written consent from their family. This type of partnership business can start just in a day, over the verbal exchange of words, without the establishment of a proper company location.

For instance, if you and your college mate, decide to provide a web-designing or accounting service for a specific time period from the classroom itself to help your batchmates over a nominal value, this would also be termed as a general partnership.

General Partnership vs Limited Partnership

When you have had a basic idea of the different types of accounting partnerships, it is always wise to understand their differences of them. So let’s get to know about it through the following comparison table -

General Partnership Accounting Information

When you get involved in this kind of partnership with your partners, the whole motto of the business is to find new ways of earning money. It is to be understood that the most obvious difference in this type of partnership is the financial account record which may differ on the basis of your stake in the business. In this, each partner shall be having his own capital account which determines the amount of investment he is willing to make in the company at a particular point in time and hence, each of them will have a right to withdraw his assets (draws) from the company.

This would be visible in separate balance sheets unless you decide to have the accounting for the partnership to be in the liability section. One more point here to be noted is, if the partner is permitted to take a loan from another, then the repayment of this loan would be considered in a separate liability account than the usual business partnership account.

If you want to add another partner to your business, then you need the consent of all other existing partners and if they have unanimous consent over the inclusion of a new individual and his stake, then only admission of a new partner can occur for which he would be granted a specific portion in the existing ownership or would be charged an “X” fee for the inclusion.

9 Things to check before forming a General partnership

When you have decided to go for a general partnership to start a business, here are the 9 key points you should consider before starting your new venture -

1. Do you really need a partner or you can handle the business with a sole proprietorship to make it grand?
2. Are you willing to sign a business partnership agreement on mutually agreed terms?
3. Do you know your partner really well and can trust him blindly for any moment - whether it is large profits or great financial losses?
4. What are the core values to achieve your business goals and vision, and do your partners have a similar mindset?
5. What are the expectations from your partners and what role do you want them to play in business growth?
6. Are you and your partners willing to do a trial run for a few months before actually plunging into the business?
7. Do you have trust in your partner’s attitude that he will be with you for every thick and thin if you decide to scale the business?
8. Do you have an exit plan in case you and your partners decide to close the business?
9. Are you and your partners willing to handle the concerned tax implications?

Real-life Examples of General Partnership

You can be in general partnership while running your own business even if the two products do not have any major connection. In this case, cross-promoting and marketing can play a big role in attracting new customers and help in business growth.

For instance, say two an energy drink brand and a portable camera brand have entered a general partnership. Now it is possible, that both these companies do not only these products as their solo medium to earn bucks. It means, they do have a large variety of products apart from the aforementioned and can become partners at global events.

Let’s take an amicable and real-life example. Consider a famous athlete taking an energy booster drink from the brand that provides it and his action is captured by a brand whose portable camera is considered the best in the world. Now if this is telecasted live on a mass scale on television and even on OTT platforms, both brands will have maximum share of thier ROI if they have entered into a general partnership as the viewers often replicate the reputed sportsman or a person they admire!  

Pros

• Increased Capital
• Talent Sharing
• Better Risk Mitigation
• Exponential Growth of Business Networks
• Divided Responsibilities
• Tax Advantages

Cons

• Liability Problems
• Communication gap can play a spoilsport
• Business continuity issues due to the death of one of the owners or any other personal issues
• Criminal Violations
• Confusion about roles and responsibilities
• Improper organization

Conclusion

The general partnership is the best possible option to start a business if you want minimum investments for maximum returns. If you have friends or office colleagues who are willing to take risks and have innovative ideas, then do get started with a new business venture before it’s too late. Deskera is the site you are looking for if you want some accounting and other knowledge to start your business. Check our various blogs on multiple topics and get insights on the questions you are seeking answers for!  

Keynotes

1. There are 4 types of business partnerships - General Partnership, Limited Partnership, Limited Liability Partnership and LIC partnership.
2. In General Partnership, 2 or more partners can start a business with an agreed amount of share on profits and losses, and steps to be taken to pay debts.
3. If you want to add one more partner to your existing general partnership business, you need consent from all others.
4. This type of partnership can start without any paperwork provided all the parties agree on the T&C and have mutual consent on the idea of the business until they have drafted the business papers.
5. The advantages include - increased talent pool, better network connections, large profits, and various tax advantages whereas the disadvantages are increased liabilities, criminal violations in business can continue for years, utter mess and confusion over business roles, a bad organization with no clear business plans.
6. Before signing the official document for this kind of partnership, all the partners must have a common answer for the various related questions for the start of the business.
7. The plus points of such a partnership are - flexibility, low cost and ease to establish for a quick start of your business.

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