partnership
Partnership is an
association of two or more persons to act as co-owners of a business for
profit.
There are
approximately 2 million partnerships in the United States. They account for
about $370 billion in receipts. However, this form of ownership is much less
common than the sole proprietorship or the corporation. In fact, partnerships
represent only about 10 percent of all American businesses.
Although
there is no legal maximum, most partnerships have only two partners. (However,
most of the largest partnerships in accounting, law, and advertising have many
more than two partners.) Often a partnership represents a pooling of special
talents, particularly in such fields as law, accounting, advertising, real
estate, and retailing. Also, a partnership may result from a sole proprietor
taking on a partner for the purpose of obtaining more capital.
Types of Partners
All partners
need not be equal. Some may be fully active in running the business, whereas
others may have a much more limited role.
General Partners A general
partner is one who assumes full or shared operational responsibility of a
business. Like sole proprietors, general partners are responsible for operating
the business. They also assume unlimited liability for its debts, including
debts that have been incurred by any other general partner without their
knowledge or consent. The law requires that every partnership have at least one
general partner. This is to ensure that the liabilities of the business are
legally assumed by at least one person. General partners are active in
day-to-day business operations, and each partner can enter into contracts on
behalf of all the others. Each partner is taxed on his or her share of the
profit—in the same way a sole proprietor is taxed. (The partnership itself pays
no income tax.) If one general partner withdraws from the partnership, he or
she must give notice to creditors, customers, and suppliers to avoid future
liability.
Limited
Partners A limited partner is a person who contributes capital to a business
but is not active in managing it; his or her liability is limited to the
amount that he or she has invested. In return for their investment, limited
partners share in the profits of the firm.
Not all states in the USA allow limited
partnerships. In those that do, the prospective partners must file formal
articles of partnership. They must publish a notice regarding the limitation in
at least one newspaper. And they must ensure that at least one partner is a
general partner. The goal of these requirements is to protect the customers and
creditors of the limited partnership.
The Partnership Agreement <**>
Some states
require that partners draw up articles of partnership and file
them with the secretary of state. Articles of partnership are a written
agreement listing and explaining the terms of the partnership. The articles
generally describe each partner's contribution to, share of, and duties in the
business. They may outline each partner's responsibility— "who will maintain
the accounts, who will manage sales, and so forth. They may also spell out how
disputes will be settled and how one partner can buy the interests of another.
Advantages of Partnerships
Ease and Low
Cost of Formation Like sole proprietorships,
partnerships are relatively easy to form. The legal requirements are often
limited to registering the name of the business and purchasing whatever
licenses are needed. It may not even be necessary to consult an attorney,
except in states that require written articles of partnership. However, it is
generally a good idea to get the advice and assistance of an attorney when
forming a partnership.
Availability
of Capital and Credit Partners can pool their funds so
that their business has more capital than would be available to a sole
proprietorship. This additional capital, coupled with the general partners'
unlimited liability, can form the basis for a good credit rating. Banks and
suppliers may be more willing to extend credit or grant sizable loans to such a
partnership than to an individual owner.
This does
not mean that partnerships can easily borrow all the money they need. Many
partnerships have found it hard to get long-term financing simply because
lenders worry about enterprises that take years to earn a profit. But, in
general, partnerships have greater assets and so stand a better chance of
obtaining the loans they need.
Retention of
Profits As in a sole proprietorship, all profits belong to the owners of the
partnership. The partners share directly in the financial rewards. Thus they
are highly motivated to do their best to make the firm succeed.
Persona!
Interest General partners are very much concerned with the operation of the
firm—perhaps even more so than sole proprietors. After all, they are
responsible for the actions of all other general partners, as well as for their
own.
Combined
Business Skills and Knowledge Partners often have complementary
skills. If one partner is weak in, say, finances, another may be stronger in
that area. Moreover, the ability to discuss important decisions with another
concerned individual often takes some of the pressure off everyone and leads to
more effective decision making.
Possible Tax
Advantages Like sole proprietors, partners
are taxed only on their individual income from the business.
Disadvantages of Partnerships
Unlimited Liability Each general
partner is personally responsible for all debts of the business, whether or not
that particular partner incurred those debts. General partners thus run the
risk of having to use their personal assets to pay creditors. Limited partners,
however, risk only their original investment.
Lack of
Continuity Partnerships are terminated in the event of the death, withdrawal,
or legally declared incompetence of any one of the general partners. However,
that partner's ownership share can be purchased by the remaining partners. In
other words, the law docs not automatically provide that the business shall
continue, but the articles of partnership may do so. For example, the
partnership agreement may permit surviving partners to continue the business
after buying a deceased partner's interest from his or her estate. However, if
the partnership loses an owner whose specific skills cannot be replaced, it is
not likely to survive.
Effects of
Management Disagreements The division of responsibilities
among several partners means the partners must work together as a team. They
must have great trust in each other. If partners begin to disagree about
decisions, policies, or ethics, distrust ra^ cloud the
horizon.
Such a mood tends to get worse as time passes - often to the point where it is
impossible to operate the business successfully. To reduce disagreements, a
number of issues can be settled when forming the partnership.
Frozen
Investment It is easy to invest money in a partnership, but it is sometimes
quite difficult to get it out. This is the case, for example, when remaining
partners are unwilling to buy the share of the business that belongs to the
partner who is leaving. To prevent such difficulties, the procedure for buying
out a partner should be included in the articles of partnership.
In some
cases, a partner must find someone outside the
firm to buy his or her share. How easy or difficult
it is to find an outsider depends on how successful the business is.
