General Business Partnerships

Do you know the adverse consequences of not selecting a business form? The law has a default form for you. Assume you  and two friends open up a restaurant. You don’t file any formal paperwork with the Missouri Secretary of State or any local/county agencies but have the understanding that the restaurant is being operated for a profit. The profits and losses are to be shared equally by all 3 people. What’s the legal status of you and your two friends?
The law would treat this relationship as a general business partnership.
A general partnership exists in Missouri when 1) two or more people 2) carry on a business as co-owners with 3) the intent to make a profit. If it’s a close call, a court will almost always find that such an arrangement is a general partnership if there is an agreement to share profits. Legally speaking, the sharing of profits is prima facie (“at first glance”) evidence of a general partnership.
General partnerships are the easiest businesses to set-up and run. But this simplicity can also be a problem. The default general partnership laws do not always jive with what business owners and entrepreneurs are looking for.  Certainly, while the tax treatment of a general partnership is usually favorable, its liability treatment is not. A general partnership provides no protection against personal liability. A general partner can be held completely liable for a debt or other claim of liability which arises out of the partnership. In addition to this liability risk, general partnerships have strict rules regarding, among other things, partnership property, accounting and succession planning.
The main takeaway is this: while it may be simpler to avoid the legalese and simply go out with your business partners and plant your flag, it is infinitely better to draft up legal documents which clearly articulate the role of business partners and flesh out the function and nature of the business enterprise.