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General Partnership

A general partnership is like two sole proprietors going into business together.

No formalities are required.  A handshake or a verbal agreement suffices, but it's a good idea to have a written partnership agreement to prepare for issues that will inevitably arise.  A general partnership may have an unlimited number of partners.  As with the sole proprietorship, there is pass-through taxation directly to each partner, so each pays taxes on his or her profits at his or her individual tax rate.  Every year, the partnership must file an information return with the IRS and give each partner a filled-in Schedule K-1 for his or her tax filing.  However, the IRS allows partners to elect to have the partnership taxed like a corporation, which may have a lower tax rate than the individual partners.  The partners would then pay individual income tax only on profits that are paid out to them as salaries, bonuses, and direct payouts.

When one partner is no longer involved with the partnership, for example because he or she withdraws or dies, the partnership automatically dissolves.  This is the case even if there are more than two partners.  However, a written partnership agreement will permit the partnership to continue.  Partnership agreements will prevent costly headaches that will inevitably arise.

Each partner is an agent.  That means that he or she may bind the general partnership.  Also, each general is personally liable for the debts and claims of the business.  Their personal assets are subject to attachment and liquidation to pay the business debt.  Therefore, you want to be sure you trust the people with whom you form a partnership.

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