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Unit 2
ADVANTAGES OF PARTNERSHIPS
Many businesses are organized as partnerships at the very beginning. There are
nearly 1.6 million businesses operating as partnerships in the United States,
which is a small number in comparison to sole proprietorships. Though most
partnerships have only two or three partners, there is no limit set on the number
of partners. Some businesses have as many as 10 or more partners. Some of the
advantages of partnerships are discussed below.
Success tip SKILLS AND ABILITIES POOLED A partnership is likely to be operated more efficiently
than a proprietorship, because a partnership can draw on the skills of two or
more people instead of just one. One partner may have special sales ability; an-
Successful entrepreneurs other may have an aptitude for buying the right kind, quality, and quantity of
are independent and self- merchandise. One partner may propose a change in the business; another part-
confident; they have deter- ner may be able to point out disadvantages in the plan and suggest changes that
mination and perseverance; were not initially apparent. In a sole proprietorship, the single owner must have
they are goal oriented; skills in all key business areas or be able to hire people with the needed skills for
they set high standards for the business to succeed.
themselves; they are cre-
ative; and they are able
SOURCES OF CAPITAL INCREASED A new business needs capital to buy the equipment,
to act quickly. Think about
inventory, and office space needed to get started. Often two or more people can
whether you have what
supply more capital than one person can. When the business needs to expand,
it takes to make it as an
generally several partners can obtain the additional capital needed for the expan-
entrepreneur.
sion more easily than one person can.
CREDIT POSITION IMPROVED The partnership usually has a better credit reputation
than the sole proprietorship. This is often true because more than one owner is
responsible for the ownership and management of the business.
CONTRIBUTION OF GOODWILL Each partner is likely to have a large personal fol-
lowing. Some people will be more likely to do business with the newly formed
partnership because they know one of the owners. This is known as goodwill.
INCREASED CONCERN IN BUSINESS MANAGEMENT Each owner of the business will have
a greater interest in the firm as a partner than as an employee. Much of this is
due to the greater financial responsibility each person has as a partner.
LOWER TAX BURDEN THAN CORPORATIONS Partnerships usually have a tax advantage
over corporations. You will learn more about this in Chapter 6. Partnerships pre-
pare a federal income tax report but do not pay a tax on their profits, as do cor-
porations. However, partners must pay a personal income tax on their individual
share of the profit.
REDUCTION IN COMPETITION Two or more proprietors in the same line of busi-
ness may become one organization by forming a partnership. This move may
substantially decrease, or even eliminate, competition.
RETIREMENT FROM MANAGEMENT A sole proprietor may wish to retire. However, the
proprietor may not want to close the business. In such a case, the owner may
form a partnership and allow the new owner to manage the business.
OPERATING ECONOMIES It is often possible to operate more efficiently by combin-
ing two or more businesses. In such a case, certain operating expenses—such as
advertising, supplies, equipment, fuel, and rent—can be reduced.
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