There are several kinds of business partnerships commercial real estate investors can enter into, with a general partnership being one of the most common. While a general partner business model is affordable to set up and extremely flexible, it has the potential to burden partners with hefty personal liabilities.
That’s why it’s paramount to know how to properly form a general partnership, choose your partners wisely, and efficiently organize your partnership for maximum results and protection.
What Is a General Partnership?
A general partnership is an agreement where two or more people share all responsibilities related to a business, including financial and legal liabilities, debts, assets and profits. A general partnership is automatically formed as soon as business is conducted between at least two people, though most people take steps to incorporate and formalize the partnership.
Under this type of business arrangement, each general partner assumes unlimited joint and personal liabilities. This structure means one of the partners can be personally liable for the actions of the others.
While a general partnership is very similar to a sole proprietorship or LLC, it requires more than one business owner. Before going into business, each potential owner must weigh the pros and cons of a general partnership to understand if this type of model is right for them.
How Is a General Partnership Organized?
One of the biggest benefits of a general partnership is that it provides the owners with the flexibility to organize their business in a way that works best for them, enabling them to closely control processes and operations. This upside results in more agile, swift management compared to corporations where different stakeholders can have competing interests; often slogging down and complicating processes.
A general partnership is typically organized using the following processes:
- Choose two or more business partners based on their skill sets, knowledge, and credibility.
- Develop a written general partnership agreement that clearly states each partner’s duties, obligations, and rights. The agreement should include the following information:
- The purpose of the general partnership and the business name
- Individual partners’ responsibilities, permitted actions, and shared duties based on their skill sets
- How each partner determines their profit share
- How disagreements will be settled
- What actions will lead to losses of the partnership
- How to change or transfer ownership
- How the assets will be divided upon dissolution
- Secure an Employer Identification Number (EIN), permits, and licenses.
- Comply with tax and regulatory requirements.
As your business progresses, you must continuously tailor your goals and plans, as well as ensure the general partnership agreement aligns with these items.
Example of a Well-Organized General Partnership
A well-organized commercial real estate general partnership can take many forms. However, a basic example of an efficient one may look like this:
Sam and Lori decide to acquire a strip mall. By entering into business together, they have become general partners in that business. They divide their responsibilities according to their unique skills. While Sam oversees leasing responsibilities, including negotiating agreements and paying invoices, Lori takes care of all marketing aspects. Neither Sam nor Lori are allowed to incur debt on behalf of the partnership or authorize capital expenditures over a certain amount without the other’s consent.
Before securing an EIN and licenses, Sam and Lori draft up an agreement both of them mutually agree on, closely review — preferably with help from a commercial real estate attorney— and sign. They split the income generated by the strip mall evenly, and both Lori and Sam assume equal responsibility for any losses incurred.
Best Practices When Structuring a General Partnership
When organizing a general partnership, here are a few best practices to keep in mind:
Qualify the Partners
Before going into business with anyone, it’s essential to determine who is best suited to be in a partnership. While general partnerships can be formed between just two persons, larger firms can be comprised of 50 or more partners.
Choose business partners who have skills, financial capacity, training, and experience that will best support the business’s goals.
Use a Formal, Written Agreement
While a general partnership is not required to have a partnership agreement, it’s in every partner’s best interest to create a formal, written agreement that clearly spells out each partner’s duties, as well as gains, losses, income, deductions, and an exit strategy in case the business fails.
Have a Long-Term Vision
While having short-term goals are fine, they are often financially driven. To build a business that experiences sustainable success, it’s imperative to develop long-term visions and goals that all partners support.
Setting Your General Partnership Up for Success
To ensure your commercial real estate general partnership enjoys long-term success, it’s essential to organize it the right way. This involves taking time to choose the right partners based on what skills and expertise they bring to the table, developing a formal contract that all partners agree on, and creating goals that will keep you motivated for the long haul.