How to Protect Yourself from Liability in a General Partnership

A general partnership is a business where partners agree to share not only the profits but also debts.  Each general partner's liability is unlimited, and they can be personally liable for the business's debts.   Cal. Corp. Code § 16306D.C. Code §§ 29-603.0529-603.06. That is why it is essential to protect yourself from liability.  There are several ways to do it.

To protect yourself from the partnership's liability:
  • Obtain liability insurance coverage for the business.  The insurance coverage should be broad enough to cover the company's business activities, associated risks, and the partners' activities. 
  • Manage and allocate your personal assets using legal protections from creditors (for example, retirement plans, certain real property, or life insurance).
  • When you decide to dissociate from the partnership, make the date of dissociation clear so that the liabilities incurred after the dissociation do not drag along.

To protect yourself from disputes with the other partners:
  • Know your partners well. 
  • Clarify your responsibilities and duties in the partnership agreement before starting the business. 
  • Have clear boundaries and transparent accounting.  Do not mix your personal assets with the partnership's assets. Require the same from all partners.
  • Avoid unilateral decision-making on critical issues that need to be decided together.  If one partner makes a business decision that causes liabilities, the other partners will likely blame him or her, which may make things complicated.
  • Have the exit strategy outlined in the partnership agreement, including dissociation, transfer of interest, and dissolution.

If you are unsure if you want to create a general partnership, remember that despite the risks of liability, there are many advantages of general partnerships. The choice of entity is a complex question, depending on many variables and your priorities (ease of governance, taxation, flexibility).