A General Partnership[i] (“GP”) is created whenever two or more persons agree to carry on as co-owners in a trade, business, financial operation or other venture for profit.

A GP can be formed by two or more persons “on a handshake and a prayer.” However, a mutual undertaking merely to share expenses does not create a partnership. The partners must share both the profits and losses of a business enterprise to be considered a partnership. A partnership meeting this basic requirement is created by operation of law whether or not the “partners” intended to form a partnership.

For federal tax purposes, the IRS considers an organization of two or more persons formed after 1996 as a GP, provided that the organization is not one of the following:[ii]

  1. An organization formed under a federal or state law that refers to it as incorporated or as a corporation, body corporate, or body politic.
  2. An organization formed under a state law that refers to it as a joint-stock company or joint-stock association.
  3. An insurance company.
  4. Certain banks.
  5. An organization wholly-owned by a state or local government.
  6. An organization specifically required to be taxed as a corporation by the Internal Revenue Code (for example, certain publicly traded partnerships).
  7. Certain foreign organizations identified in section 301.7701-2(b)(8) of the regulations.
  8. A tax-exempt organization.
  9. A real estate investment trust (REIT).
  10. An organization classified as a trust under section 301.7701-4 of the regulations or otherwise subject to special treatment under the Internal Revenue Code.
  11. Any other organization that elects to be classified as a corporation by filing Form 8832.


The GP is not subject to state rules covering organization or operation. However, the relationship among partners is governed by the state law of partnerships and by the “Partnership Agreement,” if any. Federal and state income tax regulations apply to the business operations but represent the only formalities of conducting business. No annual reporting requirements other than those made to taxing authorities are expected of the partners.

The Partnership Agreement is a contract among the partners, setting forth the rights and obligations of each partner and specifying the basis and proportions for sharing profits and losses. In the absence of such an agreement, partners have the right to share equally in the management of the business, share equally in the profits and losses of the business, and may have the authority to bind the GP with respect to commitments to third parties. “Partnership thus grants considerable power and control rights to individual team members who are partners.”[iii] A GP can be very much like a marriage, since the partners share both the benefits and burdens of the relationship.

Like a Sole Proprietorship, a GP doing business under a name that does not include the full, legal names of allpartners is considered to be operating under a fictitious business name. Therefore, the GP must register its business name by filing a certificate of assumed name. For example, let’s assume Jane Doe, John Buck and Josh Fawn start a new business called “Outdoor Hunting Clothes.” Since their actual names are not contained within the business name, the partners would be considered as doing business under a fictitious name: Jane Doe, John Buck and Josh Fawn d/b/a as Outdoor Hunting Clothes. The partners are required to make an “assumed name” filing with either the Office of the Secretary of State in which they operate the business or the Office of the County Clerk in which they operate the business, depending on state law practices.

Finally, the GP must apply for a Federal Employer Identification Number and state tax identification number. For each tax year, it is required to file a federal partnership return (Form 1065) and a state partnership return. IRS Form 1065 serves as an “informational return,” allowing the IRS to determine whether the partners have reported their income correctly. The GP must also issue a Schedule K-1 to each partner, setting forth each partner’s share of the business’s profits and losses. In turn, each partner reports this profit and loss information on her individual tax return – IRS Form 1040, with Schedule E attached. Income allocated to the partners is subject to the self-employment tax.


One of the key advantages of the GP is its flexibility to allow for a wide variation in operational and profit-sharing arrangements. Partners have great latitude in defining their relationship as long as their agreements are not illegal or contrary to public policy. Decisions may be made by consensus rather than by a majority of votes. For instance, they may agree that some partners will provide only capital while others will provide only services.

Using our example noted above, Jane Doe, John Buck and Josh Fawn are partners in Outdoor Hunting Clothes. They agree that Jane Doe and Josh Fawn will operate the business while John Buck will provide only the start-up capital and provide infusions of new cash as business circumstances dictate. Even though Jane Doe and Josh Fawn would not have contributed capital to the partnership, they are considered equal partners with John Buck, the financier, and vice versa (unless the partnership agreement provides otherwise).

Like a Sole Proprietorship, the GP is subject to only a single level of income tax; that is, a partnership does not pay income taxes as a separate legal entity. Instead, the profit earned by the GP flows through to the partners who report it as income on their personal tax return – IRS Form 1041. A partnership is a “pass-through” entity for federal income tax purposes. For the individual partner, income and expenses are reported on Schedule C, “Profit or (Loss) from Business,” of the owner’s Form 1040. Since the partner is taxed at the individual level, her “tax bracket” applies to her share of the profit.

Finally, the 1997 revisions to the Uniform Partnership Act (“Revised UPA”) add two very important advantages to the general law of partnerships:

  1. The GP is treated as an entity distinct from its partners, allowing for the ownership of furniture, fixtures and equipment (“FF&E”) to be titled in the name of the Partnership or assumed to be property of the Partnership and not its partners if the instrument conveying title refers to either (a) the person taking title as a partner or (b) the existence of the partnership; and
  2. The GP is not automatically dissolved upon the death, disability, withdrawal or bankruptcy of just one of its partners, instead allowing a majority of the partnership interests to continue the GP.[iv]

In short, the Revised UPA establishes a partnership as a separate legal entity, and not merely as an aggregate of partners. [v] However, the Revised UPA also allows “partnership creditors [to] share equally with a partner’s personal creditors in the partner’s personal assets.”[vi]


Like a Sole Proprietorship, the major disadvantage of doing business as a GP is that individual partners are personally liable for every trade debt or liability of the business. That is, the partners’ personal assets are subject to the claims of their business creditors or customers. Partners are not only individually liable for the “corporate” acts of the GP but also for the acts of any of its members engaged in carrying out partnership business. This personal responsibility is inherent in this form of doing business and is unlimited, since the law provides that each partner is an “agent” of the partnership for the purpose of its business.

Moreover, the liability imposed on individual partners is “joint and several”; that is, liability can be “apportioned either among two or more parties or to only one or a few select members of the group, at the adversary’s discretion.”[vii]“Joint and several liability” means that a creditor of the GP can collect all its debt from just one of the partners, or from a combination thereof.


While a Sole Proprietor would give up some control over the affairs of the business enterprise, she would gain from the ability to raise additional capital from partners as well as from providing additional resources from which to pay the claims of the partnership’s creditors. It may prove necessary to the Sole Proprietor who wishes to “grow the business” but has tapped all personal assets. The Sole Proprietor may also benefit from input of partners having a different perspective on the business opportunity, while sharing some of the burdens that are inherent in small business enterprises.[viii]

[i] Partnership is a very common form of business organization. In 2002, the IRS received 1,296,039 returns from all partnerships except limited liability companies with profits totaling $110 Billion. These partnerships involved over 10 million partners! See Table 14–All Partnerships Except Limited Liability Companies: Total Assets, Trade or Business Income and Deductions, Portfolio Income, Rental Income, and Total Net Income, by Size of Total Assets, Tax Year 2002, available at

[ii] See IRS Publication 541.

[iii] Margaret M. Blair, Locking in Capital: What Corporate Law Achieved for Business Organizers in the Nineteenth Century, 51 UCLA L. Rev. 387, 411 (2003).

[iv] See generally, Mann et al., supra.

[v] See The National Conference of Commissioners on Uniform State Laws, Uniform Fact Sheet, The Revised UPA has been adopted in every state but Louisiana.

[vi] Henry Hansmann, Reinier Kraakman and Richard Squire, The New Business Entities in Evolutionary Perspective, 2005 Ill. Law. Rev. 5, 9.

[vii] Joint and Several Liability, Black’s Law Dictionary, at 926 (7th ed.),

[viii] See, Entrepreneurship in America: Excessive Governmental Burdens on Small Business : Field Hearing before the Committee on Small Business, United States Senate, First Session, February 20, 1995 (U.S. G.P.O., Supt. of Docs., Congressional Sales Office (1995); Small Business Administration, Office of Advocacy, Report on the Regulatory Flexibility Act of 2005, Annual Report of the Chief Counsel for Advocacy on Implementation of the Regulatory Flexibility Act and Executive Order 13272 (Pres. Bush), April 2006.

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