What is Partnership
A business may have a small beginning as a sole proprietorship, later expand into a partnership, and finally become corporations. Partnership is a business owned by two or more people. Partnership Act defines partnership as “an association of two or more person to carry on as co- owners of a business for profit, “Other than the difference in the number of owners, a partnership is similar in many respects to a sole proprietorship.
A partnership can be based on a written contract or a voluntary and a legal oral agreement.
Types of Partnerships: The three major types are
1. general partnership,
2. limited partnership
3. Joint venture.
General Partnership: A general partnership is a business with at least one general partner who has unlimited liability for the debts of the business. Regardless of the percentage of the business they own, general partners have authority to act and to make binding decisions as owners of the business. The general partner may be liable for all the debts. Partners generally share profits and losses according to a plan specified by agreement between them.
Limited Partnership: All partnerships must have at least one general partner. A limited partnership includes one or more general partners and one or more limited partners. The general partners arrange and run the business, while the limited partners are investors only. Investors receive special tax advantages and protection from liability. Limited partners legally may have no say in managing the business. If this requirement is violated, the limited partnership status is dissolved.
Limited partnerships are usually found in real estate, dentistry, and various international arrangements. A limited partner has limited liability, being liable for loss only up to the amount of capital invested.
Joint Venture: Sometimes a number of individuals and businesses join together in order to accomplish a specific purpose or to complete a single transaction. For example, they may wish to purchase a building in down-town Boston and resell it for profit. This would be called a joint venture. Wheeling Pittsburg Steel Corporation formed a joint venture with Japans Nisshia Steel Company for the purpose of manufacturing steel in the United States and selling it around the world. Hewlett Packard (U.S.) and Samsung (South Korea) have also initiated a joint venture.
The Partnership Contract:
The business practice dictates that a partnership agreement be written and signed, although that is not a legal requirement. Such a contractual agreement is called articles of partnership. Written articles of partnership can prevent or lessen misunderstandings at a later date, Oral partnership agreements, though quite legal, tend to be hard to recreate and are open to misunderstandings. Written articles of partnership provide proof of an agreement.
A written partnership agreement includes the following main features:
Name of the business partnership
Type of business
Location of the business
Expected life of the partnership
Name of the partners and the amount of each one’s investment
Procedures for distributing profits and covering losses
Amounts that partners will withdraw for services
Duties of each partner
Procedures for dissolving the partnership.
Advantage of a Partnership:
More Capital: In the sole proprietorship, the amount of capital is limited to the personal wealth and credit of the owner. In a partnership, the amount of capital may increase significantly.
Combined Managerial Skills: In a partnership, people with different talents and skills may join together. One partner may be good at marketing; the other may be expert at accounting and financial matters. Combining these skills could provide a greater chance of success.
Clear Legal Status: Over the years, legal precedents for partnerships have been established through court cases. The questions of rights, responsibilities, liabilities, and partner duties have been covered. Thus the legal status of the partnership is clearly understood; lawyers can provide sound legal advice about partnership issues.
Ease of Starting: Because it involves a private contractual arrangement, a partnership is fairly easy to start. It is nearly as free from government regulation as a sole proprietorship. The cost of starting a partnership is low; it usually involves only a modest legal fee for drawing up a written agreement, which highly desirable.
Disadvantage of Partnership:
Unlimited Liability: Each general partner is liable for a partnership’s debts. Suppose Millar and Steven partnership fails with outstanding bills of $20000. This amount must be paid by someone. If Millar lacks the personal assets to pay the debt and Steven has the money, he has to pay off the debts. This is one reason for choosing partners carefully.
Investment Withdrawal Difficulty: A person who invests money in a partnership may have a hard time withdrawing the investment. It is easier to invest in a partnership than to withdraw. The money typically considered a “frozen investment” is tied up in the operation of the business.
Potential Disagreements: Decision made by several people (partners) is often better than those made by one. However, having two or more people deciding on some aspect of the business can be dangerous. Power and authority are divided, and the partners will not always agree with each other. As a result poor decision may be made.
Limited Capital Availability: The partnership may have an advantage over the sole proprietorship in the availability of capital, but it does not compare to a corporation in ability to raise capital. In most cases, partners have a limited capability and cannot compete in business requiring large outlays. The amount of capital a partnership can raise depends on the personal wealth of the partners and their credit ratings. It also depends on how much they are willing to invest in the partnership.
Instability: If a partner dies or withdraws from the business, the partnership is dissolved. A new partnership or some other form of business organization must be legally established.