Page 124 - Introduction to Business

98 PART 1 The Nature of Contemporary Business

Partnerships

partnerships Unincorporated Partnerships involve two or more people running a business. The partners share
businesses run by two or more the assets, liabilities, and profits of the business. Business partnerships are more
individuals
difficult to form than sole proprietorships, and while they do provide the business
with multiple financial statements on which to raise capital, they also can raise
fairly complicated issues in terms of liability. Technically, in a partnership each
partner is liable for the obligations of the other partner made in the course of doing
business. Thus, if one partner purchases goods for the business, the entire partner-
ship, that is, each of the other partners, is liable for paying for these goods, even if
the other partners didn’t know about the purchase.
Ownership in partnerships does not have to be equal; partnership shares can be
divided in any way the parties so desire. Details on this and other issues are generally
partnership agreement An agreement set forth in a partnership agreement. In most partnerships, key partners are usually
spelling out the organizational details of general partners, who share in running the business and are liable for the partner-
a partnership
ship’s actions. It may be possible, though, for some partners in a business to have a
general partners Partners who run the
partnership’s business and who are lesser degree of involvement with it. For example, limited partners are partners whose
liable for its actions liability is generally limited to only the amount of money they invested in the partner-
limited partners Partners whose liability ship. There is always the possibility of conflict among partners with respect to how to
is limited to the amount of money they run the business, although hopefully the original partnership agreement is written
invested in the partnership and who with enough detail to help avoid potential conflicts. Many professional service and
5
generally aren’t involved in running the
business related firms operate on a partnership basis. For tax purposes, partnership income (or
losses) flow directly through to the individual partners who report that income on their
individual tax returns and pay taxes on it based on their personal tax rate.

Corporations

corporations Legal “persons,” or Corporations are a completely different form of business organization than sole
entities, established for the purpose of proprietorships or partnerships. The key difference is that the corporation itself is a
doing business and distinct from their legal “person,” or entity, completely separate from the individuals involved in set-
owners in terms of liability
ting it up or running it. Once a corporation is formally established, a wall, often
referred to as a “corporate veil,” goes up between the corporation and its share-
holders, or owners. This means that the corporate entity itself is responsible for its
own debts or liabilities or, put another way, the shareholders of the corporation are
limited liability The principle that not personally liable for the debts of the corporation. This feature of limited liabil-
shareholders are not generally liable for ity is an extremely important part of the corporate structure and distinguishes it
the debts or actions of the corporation
considerably from sole proprietorships or partnerships where the owners of the
business are generally personally liable for the debts of the business. Shareholders
in corporations are similar to limited partners in partnerships in that the extent of
loss they can suffer due to their business investment is limited to the dollar amount
invested in the business. This limited liability feature is, for obvious reasons, enor-
mously helpful to corporations in raising capital. For example, in the late 1990s
individuals invested hundreds of millions of dollars in corporations involved with
the Internet. A significant number of these corporations went into bankruptcy,
owing others millions of dollars. The investors in these corporations likely lost all of
their investments, but they were not in any way personally liable for the corpora-
tion’s still-pending debts. One negative aspect of traditional corporations, however,
is that the corporate entity must file a separate corporate tax return and pay a cor-
porate income tax. Any dividends paid by the corporation to its shareholders are
then also taxed, although currently at a rate much lower than that applied to other
personal income. (Special tax rules apply to some corporations with very limited
numbers of shareholders, known as S corporations or Chapter S corporations.)
While a relatively small percentage of all businesses in the United States (no more

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