Partners are personally responsible for the business obligations of the partnership. It also means that if the partnership fails, the partners are individually responsible to pay for the debts and creditors can go after personal assets such as bank accounts, cars, and even homes.
For instance, if the partnership dissolves and there are still outstanding debts to suppliers or lenders, those creditors can sue all partners personally to pay for the debts. Debts of the partnership will expose the personal assets of the partners to liability unless they are a limited partner, in which case the liability is limited to the money they have invested.
Why Debt and Liabilities is a Huge Difference Between Partnership and Corporation or LLC
This is one of the primary differences between a partnership and a corporate entity. A creditor can sue you personally to repay business debts, whereas if you form a corporate entity, such as a limited liability company (LLC) or an S – corporation, the debt tends to end with the business.
A general partnership is easy to set up, but it is also risky because as a general partner, you and the business are one and the same; if the business gets sued or owes money to creditors, it is as if you get sued or owe creditors.
In a general partnership, you will also face the challenge of sharing not just debts but also responsibilities, profits and losses with the other partners, unlike in a sole proprietorship, where you have full control of business decisions and full responsibility for the business’s financials.
There are no formalities for a business relationship to become a general partnership. It simply means you don’t have to have anything in writing for a partnership to form. Even though there are specific requirement for a written partnership agreement, most times it is very advisable to have such a document to avoid internal squabbling (about profits, direction of the company, etc.) and give the partnership solid direction.
Taxes in a general partnership are paid through the personal income tax filings of individual partners. Note that as a partner, you have income through your share of the profits (or a loss if the partnership is losing money), and you report this income on your personal taxes. Also note that the partnership itself reports profits and losses to the IRS on a special form (so that the IRS knows how much you receive), and you pay the taxes on your portion.
In the absence of a written agreement, partnerships end when one partner serves notice of his express will to leave the partnership. But if you don’t want your partnership to end so easily, then you ought to have a written agreement that explicitly states the process through which the partnership will dissolve.
A general partnership is easy to set up, but it is also risky because as a general partner, you and the business are one and the same. However, when you’re first starting a business and have no idea where you’re going with it, a general partnership can be a huge asset. It is always important to get good advice and sit down with a business attorney to help you get started the right way.