Incorporator The Journal of U.S. Formation
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Editorial 8 MIN READ

The general partnership, reappraised

The last entity the state does not know about, and why that is no longer an advantage

The Editors
Staff, Incorporator.org
8 min read Updated
Contents 6 sections
  1. How a general partnership comes into being
  2. The liability problem, in statutory detail
  3. Subchapter K, briefly but carefully
  4. The CTA carve-out nobody meant to give
  5. Who should actually remain a GP
  6. Sources

general partnership is what two or more people form the moment they start carrying on a business for profit together, whether they mean to or not. No filing. No fee. No certificate. The state does not know you exist, and in August 2023 that is almost the only remaining thing a general partnership has going for it.

The Corporate Transparency Act takes effect January 1, 2024. Nearly every entity that owes its life to a Secretary of State filing will owe FinCEN a beneficial-ownership report. The general partnership, by the text of the statute, will not. That is a genuinely interesting fact. It is also not a reason to choose one.

How a general partnership comes into being

The Revised Uniform Partnership Act, adopted in some form by 37 states and the District of Columbia, defines a partnership as "the association of two or more persons to carry on as co-owners a business for profit," regardless of "whether or not the persons intend to form a partnership" (RUPA § 202(a)). The intent that matters is the intent to run the business together, not the intent to use the word "partnership" on a tax return. Two friends opening a food truck on a handshake are a partnership. Two siblings managing an inherited rental house together, splitting the rent, paying the plumber out of a shared account, are a partnership. The law reaches them without being asked.

This is the feature that distinguishes the GP from every other operating form. An LLC exists when the Division of Corporations stamps the Certificate. A corporation exists when the Articles are accepted. A limited partnership exists when the LP-1 is filed. A general partnership exists when two people start the business. The paperwork, when there is any, is an operating agreement between them, and even that is optional. Default rules fill the silence.

The liability problem, in statutory detail

RUPA § 306(a) is the rule that most founders never read and most practitioners never forget. Each partner is "jointly and severally liable for all obligations of the partnership unless otherwise agreed by the claimant or provided by law." Joint-and-several is not a turn of phrase. It means the plaintiff can collect the entire judgment from any one partner, not just a pro-rata share, and then leave that partner to chase the others for contribution. The partner with the house and the brokerage account pays first. The judgment-proof partner walks.

A partner is also, under RUPA § 305(a), on the hook for a co-partner's wrongful act committed "in the ordinary course of business of the partnership" or with partnership authority. The partnership vouches for its partners to the outside world, and the outside world is allowed to rely on that vouching. A mechanic in a two-partner shop who misdiagnoses a brake job creates exposure for the partner who was home with the flu that day. There is no veil to pierce because there is no veil.

An operating agreement can allocate loss between the partners, and it should. But no agreement among partners can cut off a third-party claimant whose injury the partnership caused. That requires a statute, and the statutes that do it (LLC acts, LLP registrations, corporate codes) all require a filing. The thing that makes a GP frictionless to form is the same thing that makes the liability shield impossible to assemble.

Subchapter K, briefly but carefully

Federal tax treatment is one place the GP is not exotic. It is taxed under Subchapter K of the Code, the same regime that governs LLCs taxed as partnerships and LPs. The partnership files Form 1065 as an information return and issues a Schedule K-1 to each partner reporting that partner's distributive share of income, deductions, and credits. Income is taxed to the partner, not the partnership, at the partner's rate. Losses flow through, subject to basis, at-risk, and passive-loss rules.

Capital-account maintenance under Treas. Reg. § 1.704-1(b)(2)(iv) is not optional for a partnership with any asymmetry between the partners. Allocations of income and loss must have "substantial economic effect," which in practice means the partnership maintains capital accounts, liquidates according to those accounts, and restores deficit accounts when called to. Plenty of two-person partnerships run on pro-rata splits and never confront the regulation; plenty of others wander into IRC § 704(b) on the way to a buyout and discover the cost of not having kept the books.

Self-employment tax applies to a general partner's distributive share of ordinary partnership income under IRC § 1402(a). For 2023 that is a 12.4% Social Security tax on earnings up to the $160,200 wage base plus a 2.9% Medicare tax on all earnings, for a combined 15.3% rate, with an additional 0.9% Medicare surcharge above $200,000 for a single filer or $250,000 for a joint filer under IRC § 1401(b)(2). The full earnings base, not a salary carve-out, is exposed. This is the tax disadvantage a partner taking S-corp distributions does not share.

The § 199A qualified-business-income deduction is available to partners on the same terms as other pass-through owners. For 2023 the taxable-income threshold where the wage-and-property limitation and the specified-service-trade-or-business phase-out begin is $182,100 for a single filer and $364,200 for a joint filer, set in Rev. Proc. 2022-38. Above the threshold, a lawyer's or accountant's or consultant's partnership income loses the deduction entirely; a plumbing partnership keeps it subject to the W-2-wages-and-property cap. The rules are the same as for any pass-through; the structure of a GP does not change the math.

The CTA carve-out nobody meant to give

Here is the curiosity. The Corporate Transparency Act defines the entities that must report beneficial ownership by reference to the act of formation. Under 31 U.S.C. § 5336(a)(11)(A), a "reporting company" is a corporation, LLC, or "other similar entity" that is "created by the filing of a document with a secretary of state or a similar office under the law of a State or Indian Tribe." The GP is not created by such a filing. The GP is created by two people deciding to run a business together. There is no document to file.

FinCEN said this in plain terms in its December 8, 2021 notice of proposed rulemaking at 86 Fed. Reg. 69,920, and confirmed it in the final rule at 87 Fed. Reg. 59,498 (September 30, 2022). General partnerships, sole proprietorships, and certain common-law trusts are outside the reporting regime because they do not owe their existence to a state filing. The carve-out is not a policy preference; it is the statute's plain text read correctly.

The practical consequence is real. Starting January 1, 2024, the owners of every small LLC in the country will file a BOI report, update it when facts change, and carry personal identifying information into a federal database. The owners of a GP running the same business will not. That asymmetry is worth being honest about. It is also, for most operators, not enough.

Who should actually remain a GP

Almost nobody. The liability posture is the whole answer. A two-partner business with a single slip-and-fall claim, a single defective product, a single employment dispute, a single partner who runs up a vendor tab without authority, can wipe out both partners' personal balance sheets in a way an LLC would absorb. The LLP registration, available in every state, converts the joint-and-several default into a partial or full shield for several-liability-only purposes and typically costs less than a few hundred dollars a year. The LLC does even more. Either one is a better answer than a bare GP for any business with customers, employees, or contracts.

The places a GP still makes sense are narrow. Families operating a jointly owned asset (a vacation rental among siblings, a farm among cousins) where the liability exposure is already covered by insurance and the tax filing is already happening on a K-1 can reasonably stay where they are. Short-term joint ventures between two established entities, with a written JV agreement and each entity's own shield in front of it, can use a GP as the contractual layer without stacking a new entity. One-off co-investments between trusts occasionally fit the same mold. The common thread: the parties already have shields, and the GP is the contract, not the shield.

The CTA asymmetry will produce a small wave of founders, and the consultants serving them, asking whether it is worth downgrading from an LLC to a GP to avoid the BOI filing. It is not. The reporting burden is modest; the liability swap is catastrophic. Trading a veil for a form you do not have to file is a trade nobody making it on the math would take.

The general partnership is the law's default for people who have not thought about what they are doing. In August 2023 it is also, almost uniquely, the law's default for people who have thought hard about what they are doing and concluded the filing regimes do not apply to them. Both groups exist. The second is much smaller than the first, and neither is getting a better deal than an LLP down the hall.

Sources

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