In the State of Georgia, there are multiple legal entities which can conduct business. One such entity is known as a partnership. Partnerships can be limited or general in nature. This article will focus on the advantages and disadvantages of general partnerships.
In its earliest use, a partnership encompassed joint operators who were involved in only a single transaction. Gradually, this limitation was extended to include an entire business. In 1984, the Georgia Legislature adopted the “Uniform Partnership Act”. This act defines a partnership as an association of two or more persons who carry on as co-owners of a business for profit.
The advantages of a partnership are several and usually center around avoidance of governmental taxation and other restrictions. One such advantage is that income taxes, federal and state, are charged to and paid by the individuals who compose the partnership and not by the partnership itself. Each member of the firm is a taxpayer in his individual capacity. These taxes are calculated upon the individual’s respective distributive share of the partnership, regardless of whether such profits are distributed or not. The partnership itself pays no income tax. Thus, a tax-wise entity may find a partnership is generally the cheapest form of a business unit involving two or more persons.
Another advantage of a partnership is that it is free from the red tape of publication or other filings of its records and business transactions since they are the concern of no one else but the partners. Thus, Secretary of State data and filings which are required for corporations do not exist for partnerships.
The disadvantages of partnerships are likewise numerous but tend to center around the partnership members rather than legalities. The general spirit of the law demands the utmost good faith and highest integrity among the partners and what may be considered proper dealings between individuals in the marketplace may be deemed a violation of the fiduciary relationship of the partnership members. The philosophy of the partnership concept denotes a small group of persons who know each other well and who trust one another explicitly. Upon this idea are established those legal principals that, within the scope of the partnership business a) each partner is both the principal and the agent of the firm, b) each partner is the agent of the firm with the implied power to bind the partnership and every member thereof; and c) each partner has equal rights in the management and conduct of the business, any private or secret agreements unknown to third persons to the contrary notwithstanding.
No matter the source of liability and regardless of the actual proportionate interest of the respective partners of the partnership, each partner is liable jointly and severally for all obligations, debts, and claims incurred by any one of them in the ordinary and usual course of business of the partnership.
Another disadvantage of a general partnership is the uncertainty of its continuity and very existence. A partnership that is formed for no definite period of time may be dissolved by the will, withdrawal or death of any partner, the expulsion of any partners, or decree of court. Even where the partnership is not determinable at will, but if for a definite period of time, there is nothing that can prevent any partner from dissolving the partnership in violation of his or her agreement.
This general overview of partnerships attempts to illustrate the vast options and flexibility of partnerships along with potential far reaching disadvantages from a liability standpoint. In our current era, general partnerships tend to arise from two sources: 1) those who can not afford to incorporate, and 2) those who wish to conduct all business in private. The major benefits of a partnership are its flexibility and privacy. Likewise, the major disadvantage of a partnership is its uncertain duration and potential liability to its members.
Mr. Busch is an attorney specializing in commercial and construction litigation for Busch, Reed, Jones & Leeper, P.C. in Marietta, Georgia