A partnership is “an association of two or more persons to carry on as co-owners of a business for profit.” It is a contractual relationship between the persons who have combined their property, talents, labor, and skills in an enterprise for the purpose of joint profit. The concept of this type of business structure is very broad—it can be a syndicate, pool, joint venture, or other unincorporated organization through which any business is conducted, as long as it is not a corporation, a trust, or a sole proprietorship.
5 Characteristics of a Partnership
- It’s formation requires the participation of two or more competent parties.
- The business is established on a voluntary basis of the parties involved, as distinguished from a corporation, which is created by law.
- It’s capital is established by contributions from each person’s property, capital, talents, labor, or skill.
- The business is transacted by the parties as principals, each of whom is a co-owner.
- The business can have general partners, limited partners, or family partners.
Advantages of the Partnership
- additional human resources—The success or failure of the business is not solely dependent on one single individual. The skill, talent, and labor of each partner contribute to the benefit of the business.
- ease of formation—The process of forming a partnership is slightly more extensive than that of forming a sole proprietorship, establishing the business is less formal and expensive than creating a corporation.
- additional sources of capital—The partnership depends on the resources of two or more individuals.
- flexibility—It can be more flexible in the decision making process than a corporation.
- freedom—The partnership has relative freedom from government regulation and special taxation when compared to a corporation.
- sharing of losses—The individuals in the partnership can share losses incurred in the operation of the business.
Disadvantages of the Partnership
- unlimited liability of at least one partner—A partner is responsible for the full amount of business debts, even though he or she may exceed that individual’s total investment. This liability extends to all of the partner’s assets, including home, auto, bank accounts, property, etc.
- instability—Eliminating a partner for any reason, voluntary or involuntary, including by death, automatically dissolves the business structure.
- funding—It is relatively difficult to obtain large sums of capital, including long-term financing.
- binding—All of the partners are bound by the acts of the other partners.
- disposal—Disposing of the partnership interests can be difficult, especially if a specific arrangement for this, such as a buy-sell agreement, does not exist.