Definition: A general partnership is a business organization where all partners are general partnerswho have unlimited liability and equal management authority. Unlimited liability refers to the fact that general partners personally ensure the partnership debts. In other words, if the partnership fails to make its debt payments or goes bankrupt, the lenders can sue the general partners for the remaining outstanding debt. Creditors can claim general partners’ personal assets like their cars or houses, depending on state laws, to settle the partnership debts.
What Does General Partnership Mean?
Since general partnerships consist of all general partners, the authority to run the business is divided equally amongst the partners. That is why general partnerships are usually smaller organizations. It is more difficult for larger organizations to split authority evenly. Larger partnerships are usually organized as an LLC or Professional Partnership. Limited liability partnerships can have one general partner who runs the business and have several limited partners who act as investors in the business.
When a general partnership is started, all the partners contribute either property or cash into the partnership. Once the partnership is formed, all of the assets are deemed to be co-owned by the partners. So if partner number 1 contributes his car to the partnership for a one third stake in the partnership, all three partners now own the car jointly. This is true for all general partnerships. If the partnership is ever dissolved, the remaining partnership assets are divided up amongst the partners based on the partnership agreement and the individual partners’ capital accounts.