General Partnerships

As a new business owner, one of your most important decisions is determining what form of ownership will best meet your business needs. Selecting the best structure for your business should be a carefully planned process that is discussed with a qualified professional such as an enrolled agent, certified public accountant, or attorney who specializes in this area. In addition, as your business grows over time, you may want to evaluate if a new form of ownership should be used to achieve better results.

General partnerships must have two or more persons engaged in a business for profit. The general partnership is not a separately taxed entity. It is considered a conduit where the profit or loss of the business flows through to the partners. Partnership income is taxed as income to the partners. Losses may be subject to limitations. The partners report their share of the partnership profit or loss on their individual income tax returns even if their share of those profits is not actually distributed to them.

The partners decide the entity’s structure, allocation of profits and losses, and the timing and amount of distributions. A formal written partnership agreement is advisable. Partnerships are very flexible and offer a variety of possible ownership and management structures.

General partners are jointly and severally liable for all legal and financial obligations of the partnership and for all wrongful acts of any partner acting in the ordinary course of the partnership’s business.

Key Features of General Partnerships

  • It is a flexible form of business and relatively easy to set up.
  • A general partnership must have more than one owner, unlike a sole proprietorship.
  • The cost to form one is normally less expensive than forming a corporation.
  • The general partnership does not pay income tax. A partnership is considered a pass-through entity, meaning that each partner’s share of the partnership’s profits, losses, deductions, credits, etc., will pass-through to each individual partner and those items will be reported on each partner’s tax return in accordance with their written agreement. Losses may offset income, but may be subject to limitations.
  • It exists as long as the partners agree it will and as long as there are at least two partners. This is subject to limitations imposed by California law.

How to Form General Partnerships

  • A partnership is formed when two or more persons agree to carry on a business and/or other endeavor for profit.
  • A formal written partnership agreement is advisable.
  • A Statement of Partnership Authority (Form GP-1) may be filed with the Secretary of State at the option of the partners. This document specifies the authority, or limitations on the authority, of some or all of the partners to enter into transactions on behalf of the partnership and any other matter. The Secretary of State will assign a 12-digit filing number. Keep this filing number for your tax records. Contact the California Secretary of State at 916.657.5448 or go to for more information.
  • The partners should establish a separate bank account in the name of the partnership for its financial operations.
  • Partners should consider an evaluation of the types of risks the partnership might encounter in connection with its operations. Consultation with attorneys and insurance brokers in this area is advisable.
  • Most cities and counties require a business license, various permits, and/or registration to do business within their city or county limits. If you are doing business in multiple cities or counties, you may be required to have multiple licenses. Contact the business licensing department of the city and/or county directly where your business will primarily be located for specific rules and regulations. The Governor’s CalGold online database at, the Governor’s Office of Business and Economic Development (GO-Biz) at