Partnership
Before you read
Key terms
1. Match the terms on the left with the definitions on the right.
|
a) demand recognition of the fact that one is or owns, or has a right to b) sales of goods to the general public c) land and buildings d) sales of goods to shopkeepers for resale to the public e) money got in return for work f) money used or needed for something g) a person who has been joined with others in work h) expert appraisal, valuation |
Think ahead
What type of business is a partnership most suitable to a small shop, a firm of solicitors, a large commercial bank? Explain your view point.
Text 1.3 Read the text and discuss the question: In what way are general partnerships different from limited partnerships? Explain the differences between the four different kinds of partners.
Professional Services? – Yes
A partnership is a form of business organisation in which two or more owners are associated. It is similar to a proprietorship in most respect, except the number of owners. A partnership may be based on a written contract. It is unwise for anyone to enter a partnership without a careful and clearly written contract. Partnerships have typically best served lawyers, doctors, accountants, and other professional services. However, finance, real estate, and insurance firms rank first, and wholesale and retail establishments rank second in the total number of partnerships. Partnerships are not well suited for large businesses.
Partnerships are classified as either general or limited. General (unlimited) partnerships are the most common type of partnerships. This form of partnership is owned by general partners who are usually active in the business and who must assume unlimited liability. Limited partnerships, in contrast, must contain at least one general partner who must assume unlimited liability for all business debts and limited partners. Limited partners are attracted to this form of partnership because it offers them an opportunity to invest their capital without being involved in active management. In fact, limited partners are forbidden by law to participate in the management function. Limited partnerships do offer general partners the possibility of raising additional capital without giving up managerial control of the business.
General and limited partners can also be secret, silent, dormant, or nominal. The type of a partner an individual chooses to be depends largely on the degree of involvement the individual wants in the partnership, or the types of expertise he or she brings to the business. Secret partners are active in the business, but are not known to the general public. Silent partners are known to the general public, but are not active in the management of the business. Often these partners are local or national celebrities. A dormant partner is neither active in management nor known to the public. This type of partner is often a limited partner. Nominal partners invest no capital in a partnership and thus are not true partners. Instead, they often provide experience, special skills, or other nonmonetary factors of value to the business. Thus, they give an impression that they are, or sometimes claim to be, part owners in a business.
A partnership has many of the advantages of a sole proprietorship. Each partner exercises control over the business and shares in profits and losses. The result is that the motivation to succeed is great. As a partnership may have any number of members, it is possible for individuals with talents in different operations of a business to team up. Moreover, employees with ability and ambition may be induced to stay on in hopes of being admitted to membership in the firm. This is a common practice in accounting, law, and management consulting firms. These may have a large number of partners. Since a partnership is formed as a private contract between members, no government permission is necessary. Business matters normally need not be shared with any person other than the partners. Thus, where secrecy is advantageous, as in many professional and financial businesses, the partnership form is likely to be used. The private contractual nature of a written agreement can be drawn up in a short time and at modest legal expense.
An important advantage of a partnership as compared with an individual proprietorship is that it often enables a firm to secure greater. By pooling resources, several individuals may go into business when one person alone could not. Since the personal assets of more individuals are subject to liability for the firm's debts, creditors may be more willing to make loans to a partnership. There may also be tax advantages to a partnership. In a partnership, as in a proprietorship, taxes are paid by individual partners on earnings they accrue. But the partnership as a form of organisation does not pay income taxes.
The fact that there is only a small number of partnerships means that there are some major disadvantages. The major disadvantage of the partnership is the unlimited personal liability of general partners. Each general partner shares jointly in the liability of the business. All the assets, both business and personal, of each partner are subject to claims. If one partner cannot pay off the debts, then the other is responsible for them. Only limited partners have limited liability. A further disadvantage of the partnership is its instability. Some partnerships endure for long periods of time. But when a partner dies, retires or withdraws from the partnership, a new partnership must legally be established. If a partner, even a limited one, withdraws from the firm, that partner's share must be liquidated. Usually it is sold to a person the other partners will accept. Owner conflicts are typical of the partnership. Many partners were originally social friends who later find that friends do not necessarily make good business associates. Most disagreements in partnerships revolve around divided authority. For example, one partner may want to hire an employee, while the other partner doesn’t. Like a sole proprietorship, the partnership is limited to the amount of capital investment provided by a few partners and the capital they can borrow. Although a partnership may have an excellent credit rating, it would be most difficult to borrow the large sums of capital needed to operate and maintain a major national business.
Concept check
1. Find words in the texts to complete the sentences.
A … … is active in business and assumes unlimited liability.
A … … is active in business but not known to the public.
A … … doesn't participate in the management function.
A … … is inactive but may be known as a partner.
A … … is inactive and isn't known to the public.
A … … is not a true partner in any sense.
2. Read the sentences and decide whether they are true or false.
Partners are motivated to apply their best abilities by direct sharing of the profit.
To establish a partnership government permission is required.
Creditors don’t feel like making loans to a partnership.
A general partner is responsible for the full amount of business debts.
Elimination of any partner constitutes automatic dissolution of a partnership.
Friends are the best business associates.
There are relative difficulties in obtaining large sum of capital.
A partnership may be more flexible in the decision making process than a sole proprietorship.
3. Choose from the following to complete the diagram below with advantages and disadvantages of a partnership.
Unlimited liability of at least one partner.
Relative freedom from government control.
Low organization cost.
Relative difficulties in raising capital.
Unstable life.
Great motivation.
Difficulties in relationship between partners.
Tax privileges.
READING IV