Partnership

A partnership is a legal association of two or more persons as co-owners of a business for profit. The partners share the profits and losses of the business and often the management responsibilities as well. Partnership range from small, two-person operations to international businesses with hundreds of employees. They are formed for many purposes such as sharing in the ownership of property, making contracts, and operating businesses. In a general partnership, all partners are legally equal and are liable for the business’s debts. In a limited partnership, however, one or more people act as general partners and run the business; the remaining partners are passive investors whose liability is limited to the amount of their capital contribution.

Advantages of partnerships. Partnerships share many of the advantages of proprietorships. They are easy to form, although it’s wise to get a lawyer’s advice. In addition, partnerships may provide tax advantages, since profits are taxed personal-income-tax rates rather than corporate rates. A partnership has greater profit potential than a proprietor does, since two or individuals are pulling their talents. Partnerships also have a built-in incentive for talented employees. In fields such as accounting, law, and finance, the prospect of becoming a partner in an established firm attracts top-quality employees. Partnerships also have the benefit of a definite legal standing. Usually the partners have entered into a specific explicit agreement; and even if they have nor done so, there is often an implied agreement that would be upheld in court if a legal question arose. Moreover, partnerships generally have a high credit rating since the typical partnership has several owners. Thus, a partnership can raise money more easily than a proprietorship can. In fact, many deal makers operate through limited partnerships, which raise huge pools of capital for investing in leveraged buyouts and takeovers. Another contrast to the sole proprietorship is that a partnership may have an unlimited life span, because new partners can replace retiring ones.

Disadvantages of partnerships. A fundamental drawback of the partnership arrangement is the unlimited liability of the active partners. Doctors in a partnership, for instance, may all suffer financial disaster if even one is hit with a large malpractice suit. A number of precedent-setting suits against accountants and lawyers have made those professionals aware of the hazards of unlimited liability. As a consequence, many professionals are establishing corporations as opposed to partnerships. Another disadvantage of partnerships is the potential for interpersonal problems. No two people see things exactly the same way, and conflict among partners may hurt the company. From another point of view, a large partnership has the disadvantage of being extremely competitive. Except for its clerical staff, a large partnership is said to have two kinds of people - partners and aspiring partners. Since junior employees are in competition for a limited number of partnership slots, they must work long and hard to convince the partners of their superior ability. Another major disadvantage is the management problem inherent in partnerships. If too many partners have a say in the business’s daily operations, confusion is apt to result. Thus, many partnerships name a managing partner.

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