When thinking of business partnerships that have gone sour, like the relationship between Eduardo Saverin and Mark Zuckerberg of Facebook, the Beatles, and others, you’d wonder how it managed to get so bad.
Unlike most business and entrepreneur movies, where people stage hostile takeovers and everyone plots against each other, most businesses start with good intentions, hope, and trust that they will build something big.
However, life happens, relationships go sour, people don’t adhere to their agreement, and things don’t work. The goal of this article isn’t to tell you what to do if you ever get to this point; we’ve discussed that in contract disputes. Today, we’re going over the pros and cons of partnerships to help you decide if it’s worth it to you, and how to build a safety net to ensure your assets are protected even if disputes happen.
Don’t have time to go through the entire post? We get it.
Here’s a Quick Summary:
A partnership is a business owned by two or more people who agree to share profits, losses, and management responsibilities. Unlike a corporation, there are no shareholders, no board or committees, and in most states, the law doesn’t treat the company as a different entity from the owners, which affects how you file your taxes and also your liability if the business goes into debt.
Also, for a general partnership, you don’t necessarily need a state filing. Once you start the business together, run it together, and split the income, it’s already implied that you have a general partnership, whether or not you’ve officially filed it. The informality makes it easy to set up, but it’s also a risk.
Let’s look at the different kinds of business partnerships and how they determine who manages the business and how liability is distributed amongst the partners:
This is the default partnership and easiest type of business partnership without paperwork. For example, if you decide to open a business with your friends or family and don’t file anything, you have a general partnership.
Every business partner shares the management authority, and they’re exposed to unlimited personal liability for business debts. So, if the business owes money and can’t pay it back, creditors can take partners’ assets like savings, property, etc.
The main downside to this type of partnership is that one partner’s bad decision can expose every other partner, even if they are not directly responsible for the decision.
What happens here is that there is at least one general partner with unlimited liability, typically the founder who runs the business. Then other limited partners contribute capital to fund the business but don’t run the day-to-day, and their liability is limited to what they invested in the business.
This type of partnership is not as flexible as general partnerships, so they’re less common with small businesses; they are more popular with real estate and investment funds.
Limited partnerships are common in real estate and investment funds. They’re less common for small operating businesses because managing the general/limited split adds complexity.
A limited liability partnership (LLP) essentially means you’re only liable for your own actions. In most states, once you have an LLP arrangement, you’re not personally liable for debts caused by another partner’s negligence, misconduct, or poor decisions.
This is more common with professional service firms like law and accounting firms. This is far more complex than the regular general partnership; you need state filing. Also, some states limit the kind of professions that can use the LLP structure; you might have to use a limited partnership or even a corporation instead.
You Might Also Like to Read: Choosing Between a Limited Liability Company (LLC) and a Subchapter S Corporation
If you’re trying to decide whether a partnership is the way to go, here are some of the pros:
You can start the business the same day you got the idea, especially if you’re operating a general partnership; you don’t need to file or pay formation fees. And even if you choose a partnership structure that requires registration like an LLP, it’s still way easier than forming a corporation.
You can check out this guide for how to create a multi-member operating agreement.
Another plus for setting up a partnership is that you don’t pay federal income tax at the business level. Instead, your business profits and losses pass through to each partner’s personal tax return.
This simply means that partners pay income tax on their share of earnings, and they can use partnership losses to offset other income. Unlike C corporations with double taxation: businesses pay corporate tax on profits, and shareholders still pay taxes on dividends.
Two people usually bring more than one person does: different skills, different networks, different capital. A partnership lets you divide work according to who’s actually good at it, pool startup costs, and go after bigger opportunities than either partner could on their own.
You also don’t need to set up strict bylaws like corporations or have shareholder meetings. You can run your partnership however you agree. What matters is that you have an operating agreement about how decisions are made, profit sharing, and how exits are handled.
Most lenders and investors are typically reluctant to invest in a business run by a sole member. Having more than one owner means the business is still able to keep running even if one partner has a problem or exits.
You’ve seen the good side of business partnerships, but there are two sides of a coin. Let’s look at the cons of going into a partnership:
While this is the easiest type of partnership to set up, it comes with great risks. You’re not just responsible for your decisions and debts; you’re personally responsible for all the business debts and legal obligations. This means if your partner signs a contract that puts your business at a disadvantage or makes a financial miscalculation, you will still be held responsible.
You can lose your life savings for a debt you didn’t directly approve.
It’s quite normal to not agree with everything your partner says. However, if you don’t have an operating agreement on how to navigate disagreements, they can lead to serious conflicts that can stop the business from running.
If you and the other partner can’t agree on profit distribution, workload, growth trajectory, or personal conduct, there’s no way to move forward, especially if it’s a 50/50 partnership. To prevent this, make sure you have an operating agreement that states how to navigate disputes, including appointing a tie-breaker to avoid long-term disputes and time spent in litigation.
Book a consultation with MCIS Law to create a partnership agreement tailored to you.
A general partnership dissolves when a partner leaves, dies, or goes bankrupt — unless the partnership agreement says otherwise. Without that agreement, one partner’s exit can force the whole business to wind down even if the remaining partners want to continue.
In a general partnership, you’re liable for what your partners do in the ordinary course of business. If your partner makes a purchasing decision you disagreed with, signs a contract you didn’t know about, or commits an error in their work, you can be held responsible.
An LLP limits this exposure to some degree, but a general partnership offers no protection.
Regardless of who’s putting in more work or capital, your profit will be shared equally if you don’t explicitly state how it will be shared in your agreement. But if there is an agreement, you can’t issue additional equity or restructure ownership without first amending the agreement.
Unlike corporations, where you can sell stock to investors, you only get to become a partner. They can take on investors, but those investors have to become partners themselves.
While you don’t have to pay tax on shareholders’ dividends, you still have to pay self-employment tax on your income. Sometimes it can help reduce your tax exposure, but in some cases, S corporations or LLCs taxed as S corps can reduce this exposure.
| Partnership Type | General Partnership | Limited partnership | Limited liability partnership |
|---|---|---|---|
| Personal liability | Unlimited for all partners | Unlimited for general partner; limited for limited partners | Limited for each partner’s own actions |
| Management | All partners | General partner only | All partners |
| Tax treatment | Pass-through | Pass-through | Pass-through |
| Formation | No filing required | State filing required | State filing required |
| Best for | Small businesses, professional practices | Investment ventures, real estate | Law firms, accounting firms, medical groups |
If you’re a small business owner trying to find the better choice between a partnership and an LLC, the main difference is liability protection.
An LLC separates your personal assets from business debts by default. Creditors can pursue the business’s assets, but typically can’t come after your house or savings unless you’ve personally guaranteed a debt. A general partnership offers no such separation.
Both structures use pass-through taxation, though an LLC has more flexibility in how it’s taxed. An LLC can elect to be taxed as a sole proprietorship, partnership, S corporation, or C corporation.
The main downside of an LLC is that it’s slightly more complex to form and run. You need state filing, annual fees, and in some states, annual reporting requirements. You don’t have to worry about any of these with a general partnership.
The bottom line is that if you’re looking for simplicity and liability protection, an LLC is the better structure.
Ideas can be spontaneous, but partnerships are strategic. The Zuckerbergs and Saverins of the world didn’t fall apart because they chose the wrong business structure; they fell apart because the terms weren’t airtight from the start. Whatever partnership type you go with, the agreement you sign matters more than the structure you choose.
If you’re still figuring out which structure fits your business, or you want a partnership agreement that actually protects you when things get complicated, book a consultation with MCIS Law.
This article is for informational purposes only and does not constitute legal advice. Business structure decisions involve legal and tax considerations specific to your situation. Book a consultation with MCIS Law to get personalized legal and business advice tailored to your specific situation.