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Partnership. A partnershipis a business organization that is owned by two or more persons. Partnerships offer certain advantages over sole proprietorships:
Partners bring additional funds to proprietorship.
Partners can bring fresh ideas and talents to business organizations.
Like the sole proprietorship, partnerships are relatively easy to form and are not subject to special taxation.
Partnerships have the following disadvantages:
In many cases, each of the partners is subject to unlimited liability. Partners are individually responsible for all the debts of the business. In other words, if the business were to fail, its creditors (those to whom money is owed) would have the right to recover their money from any, or all, of the partners.
Such was the case with Harold Nodough, Gloria Poor and Jack Rich who owned the Trio Dress Shoppe as a partnership. Under the terms of their partnership agreement, Nodough and Poor were each entitled to 40 % of their profits, while the remaining 20% went to Rich. Last month the firm collapsed. After selling off everything is owned, the company still owed its creditors $10000. since Nodough and Poor had no assets of their own, the creditors recovered the total amount from Rich’s personal bank account. Partnership agreements, however, can be designed to limit the liability of each partner so that investors like poor Mr. Rich can be protected.
Any time a partner dies or with draws from the business, the partnership is legally terminated. If the business is to continue, a new partnership agreement must be drawn up.
The amount of capital that a partnership can raise is limited. Exactly what this limit is will depend on the earnings of the business, the wealth of the partners, and their liability to borrow.
Partners may disagree, causing management conflicts that could threaten the firm’s existence.