Partnerships
If starting a business on your own seems a little intimidating, you might decide to share the risks and rewards by going into business with a partner. In that case, you would form a
partnership-a legal association of two or more people as co-owners of a business for profit. You and your partners would share the profits and losses of the business and perhaps the management responsibilities as well.
There are three basic types of
partnership. In a general
partnership, all partners are
legally equal and are
liable for the business's debts. In a
limitedpartnership, however, one or more people act as general partners and run the business. The remaining partners are called
limited partners because their
liability is to the amount of their capital
contribution. They cannot be sued for more money than they invested in the business. In a master
limitedpartnership (MLP), firms act like corporations, selling partner units on a recognized stock exchange. MLPs have advantages similar to corporations (
limitedliability, un
limited life, and transferable ownership).
Advantages
Proprietorships and
partnerships have some of the same advantages. Like
proprietorships,
partnerships are easy to form, although it's wise to get a lawyer's advice on the
partnership agreement-the legal
document that spells out the partners' rights and responsibilities. Partnerships also provide the same tax advantages as
proprietorships, since profits are taxed at personal income tax rates rather than corporate rates.
In a couple of respects,
partnerships are superior to sole
proprietorships, largely because there's strength in numbers. When you have several people putting up their money and pooling their talents, you can start a more ambitious enterprise and increase your chances of success. As a partner, you may also have better luck than a sole
proprietor in obtaining financing, since you and your partners are all
legally responsible for paying off the debts of the group. Finally, by forming a
partnership you increase the chances that the organization will endure since new partners can be draw into the business to replace those who die of retire. Provisions for handling the departure and addition of partners are usually covered in the
partnership agreement.
Disadvantages
A fundamental
drawback of a general
partnership arrangement is the un
limitedliability of the active partners. If one of your partners makes a serious business or professional mistake and is sued by a disgruntled
client, you are
financially accountable. You stand to lose everything you own. At the same time, you are responsible for any debts incurred by the
partnership. Even though malpractice insurance or business risk insurance offers some financial protection, you pay a
premium for your peace of mind.
Another
disadvantage is the
potential for interpersonal problems. Difficulties often arise because each partner wants to be responsible foe managing the organization. Electing a managing partner to lead the organization may diminish the conflicts, but disagreements are still likely to arise. Moreover, you may have to face the question of what to do with unproductive partners. And finally, in the ranks of the aspiring partners, competition is often fierce. The junior employees are vying for a
limited number of
partnership slots, and they view each other as rivals. This may give rise to political maneuvering or create a pressure-cooker
environment in which everyone is working 80-hour weeks in hopes of looking good.
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