Page 138 - Business Principles and Management

Chapter 5 • Proprietorships and Partnerships

DISADVANTAGES OF PARTNERSHIPS
Although there are many advantages of
partnerships, there are also disadvan-
tages, as described below.

UNLIMITED FINANCIAL LIABILITY According to
the law, each member of the partnership
has an unlimited financial liability for all
the debts of the business. If some of the
partners are unable to pay their share,
one partner may have to pay all the debts.
Suppose that the partnership of York,
Burton, and Chan failed and that after all
the business assets were changed into cash
and used to pay business debts, the partner-
ship still owed creditors $18,000. Legally, PHOTO: © DIGITAL VISION.
the partners must pay these debts from their
own personal savings or sell personal prop-
erty, such as their car or house, to obtain the
cash to pay off the debts. In this case, each
A partnership is a business
partner should contribute $6,000 ($18,000
owned by two or more persons.
divided by 3) from their personal assets. But if, say, Burton and Chan did not have
Why might a partnership be
the $6,000 in personal assets to pay their portions, York would be legally respon-
operated more efficiently than
sible for using her personal savings and property to pay the entire $18,000.
a proprietorship?
DISAGREEMENT AMONG PARTNERS There is always the danger of disagreement among
partners. The majority of the partners may want to change the nature of the busi-
ness but are unable to do so because one partner refuses. For example, a partner-
ship may have been formed to conduct a retail business selling audio equipment.
After a while, the majority of the partners may think it wise to add cellular phones
to their line of merchandise. The change may benefit the business. However, as
long as one partner disagrees, the partnership cannot make the change. Further-
more, partners sometimes feel that they are not properly sharing in the manage-
ment. This situation may cause disagreements that could hurt the business. Such a
condition can be partly prevented if the partnership agreement states the duties of
each partner.

EACH PARTNER BOUND BY CONTRACTS OF OTHERS Each partner is bound by the part-
nership contracts made by any partner if such contracts apply to the ordinary
operations of the business. If one partner commits to a contract in the name of
the partnership, all partners are legally bound by it, whether they think the con-
tract is good for the business or not. Disagreements can eventually lead to part-
nership failure.

UNCERTAIN LIFE The life of a partnership is uncertain. Sometimes when partners
draw up a partnership contract, they specify a definite length of time, such as
10 years, for the existence of the business. Should one partner die, however, the
partnership ends. The deceased partner may have been the principal manager,
and as a result of his or her death, the business may suffer. The heirs of the de-
ceased partner may demand an unfair price from the surviving partners for the
share of the deceased partner. Or the heirs may insist on ending the partnership
quickly to obtain the share belonging to the dead partner. In the latter case, the
assets that are sold may not bring a fair price; as a result, all the partners suffer

125