It's not hard to understand why partnerships are such a popular business structure.
They're flexible, easy to set up, and practical for entrepreneurs who want to pool their resources and talents to create a viable small business venture.
The most common form of small business partnership is a general partnership. Although these partnerships are usually codified through legal documents, they are typically an informal business arrangement that closely resembles a sole proprietorship. The only difference is that instead of being owned and operated by a single individual, responsibilities and ownership are distributed among two or more partners.
Ideally, each partner brings something unique to the business. Profits and equity are shared in a manner that is consistent with a partnership agreement. But what many partners don't realize is that liabilities are also shared among partners in a general partnership.
In a sole proprietorship, business owners receive no personal protection against business liabilities. They are pass-through business entities in which income and liabilities flow through to the owners' personal lives. The same is true in general partnerships. Unlike a corporation, there is no shield against business liabilities.
General business partners are responsible for three types of liabilities:
- Liability for individual actions. Each partner is held liable for her own actions in a general partnership. For example, if a partner personally sets up a display that causes a customer to trip and fall, she can be sued for negligence and her personal assets can be levied as a result.
- Liability for partners' actions. Many business partners operating under the mistaken idea that they cannot be held responsible for the business-related actions of their partner. In fact, the general partnership structure allows for any and all partners to be held liable for one another's actions. Using the previous example, the customer who tripped can sue not only the partner who set the display up, but also every other partner that is part of the business.
- Liability for employees' actions. As with any other type of business, general partnerships are legally responsible for the actions of their employees. Since general partnerships are flow-through business entities (like sole proprietorships), every partner's personal assets are on the line. So going back to our example once again, it really doesn't matter who set the display up. If you are a general partner, both your assets and the assets of the partnership are subject to liability exposure.