When two or more people agree to share profits and losses, a partnership has been formed. The business may have as many partners as agreed upon, with nothing more than a handshake or an oral agreement. In fact, state law provides that under such circumstances you have formed a General Partnership, and no formal Partnership Agreement is required by law. Like a Sole Proprietor, the partners simply obtain a business license and a sales tax number where required, then comply with any other State regulations, and they are in business. For many partners this sounds like a blessing, but in reality it can cause some serious legal and financial problems.
Disadvantages of a General Partnership
The number one disadvantage of a General Partnership is that each partner is liable for the debts and obligations incurred by all the other general partners. Consider the following points:
- You may trust your partner(s) not to improperly obligate the business; nevertheless, unpredictable situations can arise.
- Also, the more general partners you bring into the business, the greater risk you run that someone will eventually make a serious error.
- The result is every partner’s personal assets are at risk. Even if you had absolutely no connection with the actions of another partner, you are still personally responsible for the decisions made and actions taken. Your personal assets and life savings can be lost through the actions of your partner.