A general partnership is similar to a sole proprietorship in several ways. If two or more people engage is a business endeavor together and take no steps to select another entity form, the business will automatically be deemed to be a general partnership. Though a general partnership may need to obtain licenses and permits to operate the business, no specific state filings or fees are required to form a general partnership.Similar to a sole proprietorship, the owners of a general partnership are not subjected to double taxation (see discussion of corporations below). Any income received by either owner is reported on his or her personal income tax return, and the income made by the general partnership is taxed only once.

Although general partnerships can be created by the default operation of law, they are most often created when business partners sign a partnership agreement that formalizes their arrangement. Partnership agreements typically outline each of the partner's respective powers and responsibilities, how profits and losses will be divided, and how the partnership can be dissolved. If no specific agreement is reached on these issues, the law automatically provides that (a) each partner shares equally in all profits and losses; (b) each partner is an agent of the other partners, and all partners have the power to bind the partnership; (c) a majority vote is necessary to decide on all day to day operational issues, and a unanimous vote is required on all major issues; (d) a partner cannot sell or transfer his or her interest in the partnership without the consent of all the other partners; and (d) the partnership is automatically dissolved by the death, bankruptcy, or withdrawal of any partner.

Like the owner of a sole proprietorship, the partners of a general partnership are personally liable for all of the monetary and legal claims against the business. This means that the partners are also personally liable for each other's business actions. In addition, this liability is unlimited as it relates to the debts of the partnership. So for example, if Partner A binds the partnership to a business venture that ends up losing a million dollars, but Partner A has no personal assets, the partnership's creditors can come after the personal assets of Partner B and C for the money due, even if B and C were not actively involved in the deal. As you can see, general partners must have a lot of faith in each other.