INVESTORS’ CORNER: Forming a general partnership

Forming a general partnership is an incredibly easy and incredibly risky way to operate your Real Estate Business. A general partnership is an association of two or more people caring on as co-owners of a business for profit – regardless of intent.  It is easy to form because there are no papers that need to be filed. Nothing needs to be on record with the Secretary of State.  All it takes is more than one person and you are on your way.  Merely establishing that you are in business with somebody else could be sufficient to establish a general partnership.

The primary downside to a general partnership is that there is no liability protection.  Zero.

In a general partnership, both partners are jointly and severally liable for all liabilities and debts of the partnership.  This means that both partners are jointly liable for the other’s obligations and for that of the partnership.  Full liability. Zero Protection.

The primary benefit is pass through taxation.  This means that the partnership will not be taxed.  Taxes will only be incurred on the personal level.

As a business attorney and entrepreneur, I shiver at the thought of conducting business in this manner.  There are many options affording greater liability protection than general partnerships.  Pass through taxation is achievable while protecting your assets from liability.  Yet despite the risks, general partnerships are a common trap and pitfall. Frequently business people are too anxious to begin operating, rather than patiently conducting property diligence.   Your startup strategy should include investigating the proper choice of business entity.

So, if you conduct business with at least one other person, and do not formally incorporate with the Secretary of State, you’re most likely involved in a general partnership. Don’t say I didn’t warn you!

Attorney Craig Morgan is a member of Metrolina Real Estate Investors Association, www.MetrolinaREIA.com, which provides education, networking, and mentoring to investors in the Greater Charlotte area. He can be reached at [email protected], (www.providencelawcarolina.com).