In a recent article, we explained the concept of a Joint Venture. The primary characteristics that define a Joint Venture are the limited purpose and duration. The parties to a Joint Venture come together for a very specific purpose. They might want to share a research project, for example. The parties to a Joint Venture are also entering the agreement for a specific period of time. Proper Joint Ventures are not in perpetuity. So, what if the parties to a Joint Venture want to form an agreement with a broader purpose and/or without an end date? Well, that’s called a General Partnership.
What Is A General Partnership?
A General Partnership is when two or more individuals come together for a common purpose. Generally speaking, this would be some kind of business idea and the partners want to share knowledge and the work load. General Partnerships do not typically have a set end date. Unlike a Joint Venture, General Partnerships will be in perpetuity. In other words, as long as the partners continue to get along and make money, they will continue to operate the partnership.
General Partnerships can be a formal or informal as the partners want it to be. For example, the partners could come create a General Partnership by simply agreeing verbally to do so and shaking hands. They could write out a simple Partnership Agreement on a napkin or sheet of paper and sign it. Alternatively, it could be as formal as having an attorney draft a Partnership Agreement with very specific and controlling terms.
How Do Partners Share Profits?
Usually, a General Partnership agrees to split profits evenly amongst the partners. If there are two partners, each partner will receive 50% of the profits. If there are four partners, each partner will receive 25% of the profits. Profit sharing in a General Partnership is simply splitting the left over money after the expenses are covered. There aren’t any formalities like capital accounts and distributions like you will find in a Multi Member Limited Liability Company (“LLC”).
What About Liability?
Perhaps the most defining characteristic of a General Partnership is the exposure to legal liability. This is also why most people shy away from General Partnerships when forming gym businesses. For a more formal corporate set up, like a LLC, the Company can absorb most, if not all, of the legal liability, and the members’ personal assets are protected. In a General Partnership, this is typically not the case. The partners bear all of the liability if there are any legal issues with the General Partnership’s business. In other words, the company does not protect the partners. If there are any legal issues, each partner is liable and each partner’s personal assets are exposed.
Is A General Partnership Right For You?
Your business goals will determine whether a General Partnership is right for you and your partner(s). However, as we mentioned above, General Partnerships are not usually the best option for gym owners. Our goal is to help protect gym owners from legal issues. A General Partnership doesn’t accomplish that goal. Therefore, most of the time, there are better options available.
