A general partnership is a business arrangement in which two or more people decide to share in a business’ assets, profits and liabilities. It’s a way to structure your company, as opposed to being a sole proprietor or forming a limited partnership or limited liability company (LLC), and there are many general partnership advantages.
A general partnership in commercial real estate is one of the most common types of business entities because of its simplicity and the tax benefits it offers the partners. In this type of business entity, each general partner (GP) is also equally liable for the business. On the other hand, limited partners (LPs), who are often lenders or other partners, hold only limited liability, if any.
5 General Partnership Advantages in Commercial Real Estate
In real estate investing, there are many general partnership advantages, and a good number of commercial real estate investors choose this type of structure instead of other common business structures, including an LLC or an S-corporation.
General partnership advantages include:
1. Easy Set Up and Dissolution
This type of business partnership is much like establishing a sole proprietorship in that you won’t need to file any forms in the state you live in. All you need to set up your general partnership is a verbal agreement with a trusted partner or partners. You don’t even need to create an official partnership agreement with the other partners. However, partnership agreements are always a good idea.
If the general partnership doesn’t work out, it’s also easy to dissolve. To dissolve your partnership, steps include notifying federal and state tax authorities, any creditors, and your customers and vendors.
2. The Potential to Participate in Larger Deals
When you form a general partnership, you’re pooling the cash you have available to invest with a trusted partner or partners. With a larger amount of cash available to invest, you’ll be able to participate in more significant deals that could potentially generate heftier returns.
3. You Benefit From a Partner’s Expertise
Each general partner brings to the relationship their own special skills, connections and expertise. Perhaps your potential partner has a close contact at your local zoning department who will come in handy, or maybe they have special insight into a certain niche —hotels or restaurants, for example. A partner could help you find more deals.
4. Management Responsibilities Are Shared
With a general partnership, the workload is shared because you’re a team of two or more. You have another person or multiple people researching potential deals, structuring deals and then sharing the management responsibilities with you. The burden of work is distributed, freeing up your time.
5. Taxes Are Simple
When tax time rolls around, filling out your tax return and paying income tax is simple. General partnerships don’t pay any taxes on their own. Instead, all profits and losses that emerge from the partnership go through the individual partners. That means you pay your own income tax and file your own tax return.
But don’t forget about self-employment tax! You’re still on the hook for that. Limited partners do not need to pay self-employment tax unless a stipulation of the partnership agreement guarantees payments for services performed.
4 General Partnership Disadvantages
While a partnership business offers a number of compelling advantages, it also comes with a fair share of disadvantages. Commercial real estate investors who are considering forming a general partnership should first carefully consider both the pros and cons.
General partnership disadvantages include:
1. General Partners are Responsible for Other Partners’ Actions
In a general partnership, each partner is liable for what the other does. So, if your partner were to complete a deal without your knowledge or blessing, you would still be obligated to honor the terms of that deal. That’s why it’s critical when forming a general partnership to make sure you have a trusted partner or partners.
2. You’ll Have to Split the Profits
When you’re a general partner, you have to share the profits of your deals with all of your partners. The more partners you have, the smaller your piece of the pie.
3. Disagreements Could Arise
As a general partner, you should expect to occasionally disagree over deals with your fellow partners. You should be prepared for that and willing to calmly work through any differences of opinion.
4. Your Personal Assets are Vulnerable
When you’re in a general partnership, all partners are unprotected from any lawsuits that might arise against the business. As a general partner, your personal assets can be taken to pay for any of the business’ debt obligations. If a general partnership fails, the general partner is responsible for the debts.
How Are General Partnerships Used in Commercial Real Estate?
In commercial real estate, a general partnership is made up of two or more general partners who head up a real estate deal.
General partners, or GPs, find real estate deals through their network and take an active role in real estate deals. They own the property and are in charge of all components of the transaction, including operations.
General Partnership Advantages: FAQs
As you consider whether a general partnership is the best structure for your investing needs, you should fully understand the ins and outs. Frequently asked questions about general partnership advantages include:
What paperwork do I have to file for a general partnership?
While general partnerships aren’t required to file paperwork, many do file a partnership agreement in the county where they do business.
Who makes all of the decisions in a general partnership?
General partners are equally in charge of decision-making and management. That’s why it’s important to enter into a general partnership with a trusted friend or colleague and establish specific guidelines early on as to who is responsible for what.
Are my personal assets protected in a general partnership?
No. As a general partner in a general partnership, your personal assets are vulnerable should you be faced with a lawsuit or to pay for any of the business’ debt obligations. In fact, in a limited partnership, the general partner remains bound by all the debts of the business, as well.
It’s All About Trust
Setting a solid foundation for your real estate investing is critical. As you consider which business structure is best for you, take the time to fully research all of the options and weigh the pros and cons. Crucial to a successful general partnership is a smart, trusted partner. If you’ve already identified one or more potential trusted partners among your contacts, forming a general partnership may be the right choice for you.