Incorporator The Journal of U.S. Formation
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Editorial 7 MIN READ

The general partnership, a decade into the paperwork era

The entity you form by accident is the one entity the government cannot see

The Editors
Staff, Incorporator.org
7 min read Updated
Contents 6 sections
  1. How a general partnership comes into existence
  2. Joint and several liability, which is the whole story
  3. The tax treatment is where partnerships still make sense
  4. The one place the paperwork era skipped
  5. What this adds up to in operating terms
  6. Sources

general partnership forms the moment two people run a business together for profit, whether they meant to or not. In 2025, that accident of law puts the general partnership in an unusual place: it is the last common operating vehicle that remains entirely outside federal beneficial-ownership reporting.

This is not an argument for forming one. It is an accounting of what the general partnership actually is, what it costs to run, and why its regulatory invisibility is both its oldest feature and its newest one.

How a general partnership comes into existence

You do not file anything. Under the Revised Uniform Partnership Act (RUPA) as adopted in most states, a partnership is "the association of two or more persons to carry on as co-owners a business for profit," and it forms "whether or not the persons intend to form a partnership." That is RUPA §202(a), and the language is the same in the Delaware, California, Texas, and New York enactments.

The consequence is legal formation by conduct. Two freelancers sharing revenue on a project, a couple operating a rental property jointly without an LLC, two engineers splitting invoices from a client they both sold to: these are partnerships, and courts will treat them as such when something goes wrong. The only state filing a general partnership typically encounters is a Statement of Partnership Authority, optional in every RUPA state and used mostly to establish one partner's power to transfer real property on the entity's behalf.

If you have done nothing, you have probably done this.

Joint and several liability, which is the whole story

The reason lawyers push clients out of general partnerships and into LLCs is RUPA §306(a): "all partners are liable jointly and severally for all obligations of the partnership." Each partner is personally on the hook for the full amount of any partnership debt, contract liability, or tort judgment, not a pro-rata share. A plaintiff with a $2 million judgment can collect the entire amount from whichever partner has assets, and that partner's only recourse is a contribution claim against the co-partners, worth exactly as much as the co-partners are solvent.

The liability is also vicarious. Under RUPA §305, a partner is liable for the wrongful acts of another partner committed in the ordinary course of partnership business. Your co-partner's negligence is your problem. This is the structural feature that makes the general partnership unsuitable for any business with operational risk: clients, contracts, employees, vehicles, inventory, premises.

The tax treatment is where partnerships still make sense

General partnerships file Form 1065, the partnership return, and issue a Schedule K-1 to each partner reporting that partner's share of income, deductions, credits, and separately stated items. The partnership itself pays no income tax; the partners do, on their individual returns, whether or not the partnership distributed cash. This is Subchapter K, and it has been the federal treatment of partnerships since 1954.

The mechanics that matter in practice:

Capital accounts are maintained under Treasury Regulation §1.704-1(b)(2)(iv), the §704(b) capital account rules. Each partner's capital account tracks contributions, allocations of income and loss, and distributions. Allocations of tax items must follow capital-account interests or have "substantial economic effect" under §704(b). That is the trap for partnerships whose drafted allocations do not match the economic deal; most small partnerships file amendments after the first year because the 1065 preparer catches it.

Self-employment tax is the other major cost. A general partner's distributive share of partnership income is self-employment income under IRC §1402(a), meaning it runs through Schedule SE. The 2025 rate is 15.3% up to the Social Security wage base of $176,100 (12.4% OASDI plus 2.9% Medicare), after which the Medicare portion of 2.9% continues without a cap. An Additional Medicare Tax of 0.9% applies to self-employment earnings above $200,000 for single filers or $250,000 for married filing jointly, enacted in 2013 and unchanged since. A general partner earning $300,000 of distributive share in 2025 pays SE tax on the full amount and Additional Medicare on the portion above the threshold.

The §199A deduction softens this. For 2025 the taxable-income thresholds at which the §199A deduction begins to phase out are $197,300 for single filers and $394,600 for joint filers, per Revenue Procedure 2024-40. Below the threshold, a partner in a general partnership operating a qualified trade or business can deduct up to 20% of qualified business income, subject to the overall cap of 20% of taxable income less net capital gain. Above the threshold, the W-2 wage and UBIA limitations kick in, and specified service trades or businesses (health, law, consulting, financial services) begin to phase out entirely. The §199A deduction is scheduled to sunset at the end of 2025 unless Congress extends it, a detail that will dominate partnership tax planning for the rest of this year.

The one place the paperwork era skipped

The Corporate Transparency Act took effect January 1, 2024, and required most entities formed or registered in the United States to file beneficial-ownership information reports with the Financial Crimes Enforcement Network (FinCEN). The definition of "reporting company" in 31 U.S.C. §5336(a)(11)(A) is what did the work: a reporting company is one "created by the filing of a document with a secretary of state or a similar office."

General partnerships are not created by the filing of a document. They are created by conduct under RUPA §202(a). That single word, "filing," is why general partnerships were outside the CTA from the beginning. FinCEN's rulemaking confirmed this. In the proposed rule and again in the final Beneficial Ownership Information Reporting Requirements rule published at 87 Fed. Reg. 59498 (September 30, 2022), the agency stated explicitly that general partnerships not formed by filing are not reporting companies. Limited partnerships, limited liability partnerships, and limited liability limited partnerships all require a state filing and are reporting companies. General partnerships alone escape.

The CTA itself has had a difficult year. After the Fifth Circuit's injunction activity in late 2024, the Supreme Court stayed the nationwide injunction from the Eastern District of Texas in Texas Top Cop Shop, Inc. v. Garland on January 23, 2025, briefly bringing reporting obligations back into force. The underlying litigation continues, and FinCEN has issued successive interim guidance pieces shifting deadlines while the case proceeds. Throughout every twist of this docket, the general partnership's status has been unchanged: no state filing, no reporting obligation, regardless of how the broader CTA question is resolved. The architecture that now applies to tens of millions of reporting entities does not reach the entity that forms when two people shake hands.

This is not a loophole in any ordinary sense. It is the structural consequence of a federal reporting regime hooked to state filings. The drafters understood this, and the choice survives in the current statute.

What this adds up to in operating terms

The general partnership in 2025 occupies a narrow but real position. It is cheap to form (zero), cheap to maintain (no annual state filing in most states, no registered-agent requirement, no Statement of Partnership Authority unless you want one), taxed cleanly through Subchapter K with access to §199A, and outside the CTA. It is also a full-liability exposure and a trust exercise between partners, because one partner can bind the other on a contract or a tort judgment without warning.

Practitioners who still recommend a general partnership do so for a narrow set of fact patterns: a small professional collaboration between partners who know each other well and face limited tort exposure; a family joint venture holding passive assets where liability risk is nil and the 1065 mechanics are familiar; or a short-duration project partnership that will dissolve within the tax year and does not justify forming and cancelling an LLC.

Everything else still belongs in an LLC, an LP, an S-corp, or a C-corp. The liability math does not change because the paperwork calculus shifted.

One concrete point for 2025: if you are already operating a general partnership and planning to convert to an LLC, the conversion is the moment the CTA applies. The new LLC is formed by a state filing, which makes it a reporting company, which means beneficial-ownership reporting within the window FinCEN has set by its current interim guidance. The general partnership you dissolve along the way had no such obligation. The entity you formed by accident was the one the government could not see.

Sources

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