Why general partnerships are so risky

July 27, 2025

By Nadia Cabrera-Mazzeo, Esq.

A general partnership is automatically created when a group of two or more people go into business together without forming an LLC or corporation.

What is a general partnership?

A general partnership is automatically created when a group of two or more people go into business together without forming an LLC or corporation. You may be familiar with the term “sole proprietor,” which is a person who does business on their own without forming an LLC or corporation. Many professionals are content to do business as sole proprietors and it’s a fine option for small, low-risk businesses. In a sole proprietorship, there is no legal difference between the business and the business owner, so the owner is ultimately responsible for any and all business debts and other risks.

A general partnership is essentially the same thing as a sole proprietorship when there is more than one person involved in the business. But when there are more people involved in a business, the risk level goes up. This is because, like in a sole proprietorship, what the owner says, goes.

When there is more than one owner, what any of the owners say, geos—and all owners bear the same responsibility over the consequences.

Why are general partnerships risky?

In a general partnership, all the owners have equal and ultimate power over what happens in the business and all the owners are equally and ultimately on the hook for the results and consequences of any owner’s actions. Even when the other owners don’t agree or don’t even know that a decision was made, they are personally on the hook.

For example, say Anne, Brandon, and Cal all go into business together selling ceramics at the farmers market under the name ABC Ceramics. They decide it’s a low-risk business and don’t want the hassle of forming and maintaining an LLC.

They all vote on spending $1,000 on a tent for the market. Things are great and they dream of having their own brick and mortar store. Brandon’s friend is a real estate agent and informs him of a small storefront that’s about to become available but they have to move fast. Anne and Cal just got married and are on their honeymoon away from their phones. Brandon knows that they can’t pass up this opportunity and signs a five-year commercial lease for $1,200 per month and takes out a $20,000 loan for start-up costs including a big new kiln.

Anne and Cal are appalled to learn this because they were about to tell Brandon that Anne got a new job out of state and they are moving in a month. Even though they weren’t consulted about these decisions, they are as responsible for the lease and loan as Brandon. If ABC Ceramics doesn’t make enough money, they will have to pay out of pocket for the loan and to break the lease.

The above example contains many unnecessary risks. If ABC Ceramics were an LLC or corporation, the owners would likely not have to pay out of pocket for the loan or to break the lease if

    the business went bankrupt;

    the Operating Agreement or Bylaws would likely require a vote before entering into a commercial lease or taking out a loan and if Brandon went ahead with the lease and loan without a vote, Anne and Cal would be able to hold him accountable;

    Anne and Cal could more easily bow out of the business, redefine their roles, or find replacement partners for Brandon to keep it going.

You can see how an LLC or corporation not only protects the owners from the debts of the business, but also from each other. Even when going into business with awesome, trustworthy people, you never know when someone may exercise judgment you do not agree with. There is risk in any situation where the owner is personally responsible for the business debts. When that responsibility extends beyond one’s direct control, the risk becomes greater.

Law office of Nadia Cabrera-Mazzeo, Esq.

Small business and contracts lawyer

Based in Taos, serving clients throughout New Mexico

505 427 2025

nadia@honestcontracts.com

The information on this website is not legal advice and does not create an attorney-client relationship. The rates and fees listed on this website may not be the most up to date.