Partnership

Now let's look at partnerships: Just like in any other element of society, when more than one person is involved, things become a little more complicated. As you'll see, unlimited liability is an issue with partnerships as well. Read this section and in light of what you learn, think about what advice you would give Jason in the exercise at the end of the section.

KEY TAKEAWAYS

  • A general partnership is a business owned jointly by two or more people.
  • About 10 percent of U.S. businesses are partnerships.
  • The impact of disputes can be reduced if the partners have a partnership agreement that specifies everyone's rights and responsibilities.

  • A partnership has several advantages over a sole proprietorship:

    • It's relatively inexpensive to set up and subject to few government regulations.
    • Partners pay personal income taxes on their share of profits; the partnership doesn't pay any special taxes.
    • It brings a diverse group of people together to share managerial responsibilities.
    • Partners can agree legally to allow the partnership to survive if one or more partners die.
    • It makes financing easier because the partnership can draw on resources from a number of partners.

  • A partnership has several disadvantages over a sole proprietorship:

    • Shared decision making can result in disagreements.
    • Profits must be shared.
    • Each partner is personally liable not only for his or her own actions but also for those of all partners - a principle called unlimited liability.
  • A limited partnership has a single general partner who runs the business and is responsible for its liabilities, plus any number of limited partners who have limited involvement in the business and whose losses are limited to the amount of their investment.