A partnership is similar to the sole proprietorship except that the business has more than one owner. Partnerships are often formed to bring together different skills or talents, or to obtain the necessary capital. Although partnerships are generally larger than sole proprietorships, they are not typically large businesses. Partnerships are common in finance, real estate, insurance, public accounting, brokerage, and law.
The partnership contract (articles of partnership) spells out the rights of each partner concerning such matters as profit distribution and fund withdrawal. Partnership property is jointly owned. Each partner’s interest in the property is based on his or her proportionate capital balance. Profits and losses are divided in accordance with the partnership agreement. If nothing about distribution is stated, they are distributed equally. Each partner acts as an agent for the others. The partnership (and thus each individual partner) is legally responsible for the acts of any partner. However, the partnership is not bound by acts committed beyond the scope of the partnership.
Advantages of Partnership
- Partnerships can be easily established, with minimal organizational effort.
- Partnerships are free from special governmental regulation, at least compared to corporations.
- The income of the partnership is taxed as personal income to the partners.
- More funds are typically obtained than by a sole proprietorship.
- Better credit standing results from the availability of partners’ personal assets to meet creditor claims.
- Partnerships attract good employees because of potential partnership opportunity.
Disadvantages of Partnership
- It carries unlimited liability for the partners; each member is held personally liable for all partnership debts.
- It dissolves upon the withdrawal or death of any partner.
- As it cannot sell a stock, its ability to raise significant capital is limited, which may restrict growth.