Partnerships- Business Organization
Partnerships are business organizations that are legally established by more than two individuals who share similar interests. The formation of a partnership business does not separate personal liabilities from business responsibilities. The two types of partnership that are legally recognized are general partnership and limited partnership. Although most general partnerships are formed through mutual agreements, the law requires such agreements to be formalized before they acquire licenses. General partnerships’ liabilities are shared among partners, but limited partnerships allow partners to enjoy limited liability. Limited partnership businesses protect personal assets of their partners, although the partners are not free from liabilities.
The law of partnership is usually geared toward the needs for small firms. Every partner looks into the business for a share of his/her profit, which is the return for the capital contribution. Sometimes general partnership entities do not have legal duties, as the partnerships are made up of family members, or are owned by friends with mutual benefits. Most general partnership businesses are ran through agreements set by the owners, where each partner has an obligation. However, the limited partnership can lose liability protection if they assume the duties of running the business.
Partnership businesses are ordinarily involved in small business with limited scope. Thus, their firms’ size is relatively small. The management and control of partnership depend on the type of partnership. The general partners share the responsibilities of running the business even after contributing the capital. The law permits a limited partnership to be run by one general partner while other partners contribute the capital without involving themselves in the management of the entity.
One of the disadvantages of general partnership is that the Internal Revenue Service collects taxes from the profit earned by the partners. However, limited partnership benefit from the union as the business does not pay tax on its income. Partners pay tax from their income, rather than from the business entity. Transferability in general partnership is more difficult than in limited partnership. One of the disadvantages in general partnership is that the death of one partner may result to the end of business entity, as there are no rules to guide on succession or replacement of partners. However, a limited partnership does not dissolve after the death of one partner. The business can go on after reaching an agreement with the deceased partner’s family. The limited partnership can opt to include a new partner, or continue running with the remaining partners.
In real world situations, partnerships are formed to attain joint interests in business operations. Even without legal formalities, family members and friends can agree to establish general partnerships with an aim of earning profits and sharing responsibilities. On other instances, the partners may contribute the capital to start a business venture, but they do not have the capacity to run the business. The partners in a limited partnership can choose to employ other people to run the business on their behalf. The amount contributed by partners may not necessarily be equal, as their contribution determines the amount of profit that each partner is entitled to at every end of year.
A major disadvantage of partnership is that if one of the partners causes the business to incur a loss, the partner’s personal properties can be taken to recover the loss. In a limited partnership, partners are protected from business liabilities. Partners in limited partnership have to prove that they are capable of running the business before they are given the opportunity to do so. Partners in limited partnership can take the advantage of the partnership to borrow some money to invest in the business, and insure their money against incurring a loss. However, such partners cannot be trusted with the management of the business because he/she is perceived to take fewer precautions while undertaking business operations.