Partnership
by MaestriA partnership exists whenever two or more persons associate to conduct a noncorporate
business. Partnerships may operate under different degrees of formality, ranging from informal, oral understandings to formal agreements ?led with the secretary of the state in which the partnership was formed. The major advantage of a partnership is its low cost and ease of formation. The disadvantages are similar to those associated with proprietorships: (1) unlimited liability, (2) limited life of the organization, (3) dif?culty transferring ownership, and (4) dif?culty raising large amounts of capital. The tax treatment of a partnership is similar to that for proprietorships, but this is often an advantage, as we demonstrate in Chapter 9.
Regarding liability, the partners can potentially lose all of their personal assets, even assets not invested in the business, because under partnership law, each partner is liable for the business’s debts. Therefore, if any partner is unable to meet his or her pro rata liability in the event the partnership goes bankrupt, the remaining partners must make good on the unsatis?ed claims, drawing on their personal assets to the extent necessary. Today (2002), the partners of the national accounting ?rm Arthur Andersen, a huge partnership facing lawsuits ?led by investors who relied on faulty Enron audit statements, are learning all about the perils of doing business as a partnership. Thus, a Texas partner who audits a business that goes under can bring ruin to a millionaire New York partner who never went near the client company.
The ?rst three disadvantages—unlimited liability, impermanence of the organization, and dif?culty of transferring ownership—lead to the fourth, the dif?culty partnerships have in attracting substantial amounts of capital. This is generally not a problem for a slow-growing business, but if a business’s products or services really catch on, and if it needs to raise large sums of money to capitalize on its opportunities, the dif?culty in attracting capital becomes a real drawback. Thus, growth companies such as Hewlett- Packard and Microsoft generally begin life as a proprietorship or partnership, but at some point their founders ?nd it necessary to convert to a corporation.
Taken From : Five-Minute MBA – Corporate Finance
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