A partnership is a legal form of business in the United States with two or more persons as owners. The Uniform Partnership Act of the United States defines this form of business as an association of two or more individuals to act as co-owners of a business. Similar to sole proprietorship, the law does not distinguish between the business and its owner.
The partnership agreement is a legal agreement that serves as the foundation of a partnership. It provides a blueprint for making business decisions, distribution and sharing of profits, resolution of disputes, inclusion of future partners, exclusion of current partners, and dissolution of the entire business.
Three specific forms of partnership in the United States
Depending on the distribution of management responsibilities and liabilities, there are three forms of partnership in the United States. Below is a quick overview for each form of partnership:
- General partnership is a form of partnership in which partners share equally in responsibility and liability. These partners or owners are general partners. This means that they have shared responsibilities and liabilities. A general partner assumes unlimited liability for the debts of the business, including the debts incurred by another general partner.
- Limited partnership is a form of partnership that involves one general partner who assumes full responsibility and liability and limited partners who have limited responsibility and liability. This limitation usually depends on the percentage of investment.
- Limited liability partnership is a form of partnership in which all partners have limited liabilities and the entire business has no general partner. Each partner is not personally liable for the acts of fellow partners. They are also not personally liable for the debts and contractual obligation of the business.
Advantages of a partnership as a form of business in the U.S.
1. Easy and low cost to form: Compared to limited liability companies or corporations, partnerships in the U.S. are easy and cheap to form like sole proprietorships. Common legal requirements include registering a business name and securing required licenses or permits. The majority of time spent to form this business is focused on developing the partnership agreement.
2. Access to capital and credit: An owner of a sole proprietorship caries the sole burden of raising capital or securing credit. In a partnership, partners pool their funds and assets so that they have more capital that would otherwise be unavailable to a single proprietor. Each partner can also secure personal loan depending on his or her credit standing. This is another advantage of partnership over sole proprietorship.
3. Direct retention of profits: Unlike in a corporation and similar to a sole proprietorship, U.S. laws mandate that all profits belong to the owners of the partnership. This can motivate partners to work diligently to build and maintain the profitability of their business. However, the division of profit among partners depends on the partnership agreement.
4. Complementary skills and knowledge: Partners combine their skills and knowledge to form and operate the business. This can also have a mutual and complementary effect. Each partner contributes his or her resources and expertise for the benefit of the business. The weakness of one partner is offset by the strength of other partners. Making decisions becomes a shared responsibility. This creates a competitive advantages over sole proprietorship businesses.
5. Possible tax advantage: A partnership may have a tax advantage over corporation under U.S. laws. Like sole proprietorships, the business is not taxed separately from the owners. The personal income of each partner is the basis for taxation. This business is also free from paying special taxes such as franchises taxes for limited liability companies and corporations operating in some states.
Disadvantages of a partnership as a form of business in the U.S.
1. Jointly and individually liable: Partners in a general partnership are jointly and individually liable for the actions of other partners. Each partner or each individual general partner is personally liable for all the debts and obligations of the business. The federal or state government of the U.S. or creditor may cease the personal assets of the general partners if the asset of the business is insufficient to pay debts or other obligations. This translates to unlimited liability or general partners. However, limited partners risk only their original investments. This is a considerable disadvantage of partnership over limited liability companies or corporations.
2. Management disagreements: Disagreements among partners are inevitable. However, severe instances of disagreements might hamper the operation of the business or result to its termination. Remember that not all partnerships work. Some situations make sole proprietorship advantageous. Owners of the business may have competing interests or unique preferences. Severe differences among partners can result in acrimony, deadlock, or dissolution.
3. Determining profit shares: The division of profits might become an issue among partners. This is especially true when one or more partner feels that some of their co-owners are not deserving of what they are getting. Unequal contribution of time, effort, and resources might become an issue among owners.
4. Problem with continuity: The partnership will terminate if any one of the partners dies or leaves. Bankruptcy of the partner will also terminate the business. However, remaining partners can purchase the share of the leaving partner. While U.S. law generally prescribes discontinuity due to a partner leaving the business, a partnership agreement can remedy this by detailing actions for continuity or other contingency actions. This is another disadvantage of partnership over corporations.
5. Getting out of the partnership: Pulling out an investment or quitting the business might be difficult especially if remaining partners are unwilling to buy the share of an individual partner who wants to retire or quit for other reasons. A partnership agreement can remedy this scenario by providing proper exit or buyout procedure.