Partnership

A partnership is a legal association of two or more persons as co-own-

ers of a business for profit. The partners share the profits and losses of

the business and often the management responsibilities as well. Partner-

ship range from small, two-person operations to international businesses

with hundreds of employees. They are formed for many purposes such

as sharing in the ownership of property, making contracts, and operating

businesses. In a general partnership, all partners are legally equal and are

liable for the business’s debts. In a limited partnership, however, one or

more people act as general partners and run the business; the remaining

partners are passive investors whose liability is limited to the amount of

their capital contribution.

Advantages of partnerships. Partnerships share many of the advantages

of proprietorships. They are easy to form, although it’s wise to get a law-

yer’s advice. In addition, partnerships may provide tax advantages, since

profits are taxed personal-income-tax rates rather than corporate rates.

A partnership has greater profit potential than a proprietor does, since

two or more individuals are pulling their talents. Partnerships also have

44

a built-in incentive for talented employees. In fields such as accounting,

law, and finance, the prospect of becoming a partner in an established

firm attracts top-quality employees. Partnerships also have the benefit of

a definite legal standing. Usually the partners have entered into a spe-

cific explicit agreement; and even if they have not done so, there is often

an implied agreement that would be upheld in court if a legal question

arose. Moreover, partnerships generally have a high credit rating since

the typical partnership has several owners. Thus, a partnership can raise

money more easily than a proprietorship can. In fact, many deal makers

operate through limited partnerships, which raise huge pools of capital

for investing in leveraged buyouts and takeovers. Another contrast to the

sole proprietorship is that a partnership may have an unlimited life span,

because new partners can replace retiring ones.

Disadvantages of partnerships. A fundamental drawback of the partner-

ship arrangement is the unlimited liability of the active partners. Doctors

in a partnership, for instance, may all suffer financial disaster if even one

is hit with a large malpractice suit. A number of precedent-setting suits

against accountants and lawyers have made those professionals aware of

the hazards of unlimited liability. As a consequence, many professionals

are establishing corporations as opposed to partnerships. Another disad-

vantage of partnerships is the potential for interpersonal problems. No two

people see things exactly the same way, and conflict among partners may

hurt the company. From another point of view, a large partnership has

the disadvantage of being extremely competitive. Except for its clerical

staff, a large partnership is said to have two kinds of people – partners and

aspiring partners. Since junior employees are in competition for a limited

number of partnership slots, they must work long and hard to convince

the partners of their superior ability. Another major disadvantage is the

management problem inherent in partnerships. If too many partners have

a say in the business’s daily operations, confusion is apt to result. Thus,

many partnerships name a managing partner.

Text 4

Read the following text and answer the questions that follow it.