Page 139 - Business Principles and Management

Unit 2

a loss. A partnership can carry insurance on the life of each partner to provide
money to purchase the share of a partner who dies. Under the laws of most
states, the bankruptcy of any partner or the admission of a new partner are
other causes that may bring a sudden end to the partnership.

LIMITED SOURCES OF CAPITAL The contributions of the partners, the earnings of the
business, and the money that can be borrowed limit the amount of funds that a
partnership can obtain. It is difficult for a partnership to obtain enough capital
to operate a large business unless each member of the partnership is wealthy or
PHOTO: © GETTY IMAGES/PHOTODISC. UNSATISFACTORY DIVISION OF PROFITS Sometimes the partnership profits are not di-
unless there are many partners. Too many partners, however, may cause ineffi-
cient operations.

vided fairly according to the contributions of the individual partners. Partners
should agree up front on how to divide profits according to the amount of labor,
expertise, and capital each partner is expected to contribute. The partnership
should then specify the agreed-upon division in the partnership agreement, such
as 60 percent to one partner and 40 percent to another. If no provision is made
in the agreement, the law requires an equal division of the profits. Then if, say,
one partner contributes more time, expertise, or labor to the business than do
A limited partnership restricts
the others, this partner may feel that he or she deserves more than an equal
the liability of a partner for
share of the profit.
the amount of the partner’s
investment. Why might a
limited partnership be a useful DIFFICULTY IN WITHDRAWING FROM PARTNERSHIP If a partner wishes to sell his or her
form of business organization? interest in the business, it may be difficult to do so. Even if a buyer is found, the
buyer may not be acceptable to the other partners.

LIMITED PARTNERSHIPS
In an ordinary (general) partnership, each partner is personally liable for all the
debts incurred by the partnership. The laws of some states, however, permit the
formation of a limited partnership, which restricts the liability of a partner to
the amount of the partner’s investment. In a limited partnership, not all part-
ners have unlimited financial liability for the partnership debts. However, at
least one partner must be a general partner who has unlimited liability. In many
states, the name of a limited partner may not be included in the firm name.
Under the Uniform Limited Partnership Act, the states have created similar
regulations for controlling limited partnerships. For example, the law requires
that a certificate of limited partnership be filed in a public office of record and
that proper notice be given to each creditor with whom the limited partnership
does business. If these requirements are not fulfilled, the limited partners have
unlimited liability in the same manner as a general partner.
The limited partnership is a useful form of business organization in situations
where one person wishes to invest in a business but does not have the time or in-
terest to participate actively in its management. Any business that is formed as a
proprietorship can usually be formed as a limited partnership.

CHECKPOINT
List the advantages and disadvantages of being in
a partnership.

126