Agriculture Reference
In-Depth Information
individual has personally invested in the business. The state laws regulating limited partner-
ships must be strictly adhered to and these acts spell out the limited status of partners: fi rst,
the limited partner can contribute capital but not services to the partnership, and second, the
limited partner's surname cannot appear in the business's name (unless the partnership
had previously been carried on under that name, or unless a general partner has the same
surname). Limited partnerships are relatively few in number; therefore, the balance of the
discussion of partnerships will apply to general partnerships. However, it is important
to note that if a limited partner takes an active role in managing the business, their limited
liability may cease.
Advantages of partnerships
Partnerships are just about as easy to start as proprietorships. They require very little expense,
although an attorney competent in partnership law should be engaged to draw up the partner-
ship agreement. The partnership may operate under an assumed or fi ctitious name, provided
it is registered in accordance with state laws. A partnership can generally bring together
many more resources than a proprietorship because of the increase in the number of people
involved. These added resources are not only fi nancial in nature; the business also benefi ts
from the variety of unique talents that many different individuals can bring to it. Partners are
a team, and because each team member shares in the responsibility and profi ts, partners are
more likely to be motivated than employees of a single proprietorship or corporation.
Additional partners can be brought in if more money or talent is needed.
Partners, as individuals, pay taxes only on the income generated from their share of the
profi ts. There is no business tax
per se
, and this can be a considerable advantage, depending
on the income of the partners. Control or management of business decisions and policies is
concentrated among the partners. Generally, partners divide the responsibilities of the busi-
ness: that is, one will head sales; another will head operations, input acquisition, etc. This
can be done on either a formal or an informal basis. Partners may sell their interest in the
business to others if the remaining partners agree. The business affairs of a partnership are
confi ned to the partnership, and this element of privacy is one of the prime reasons why
many people choose to do business as partners. Partnerships share the same privileges of
doing business in other states as does the proprietorship form of business organization.
Disadvantages of partnerships
By far the biggest disadvantage of the partnership is the unlimited liability of each general
partner. There are many known cases where one partner has generated fi nancial obligations
for the partnership, and then because that individual has been personally insolvent, the other
partners have had to pay the bills. Even limited partners must be very careful that they do
not give any appearance of being active in the management of the business. The law has
frequently been enforced on the basis of a person's actions rather than on the basis of
the written documents. If a person acts as a general partner would act, then that partner may
be forced to accept all the liabilities that such status would incur, even if the formal, written
agreement says the individual is a limited partner.
The liability of general partners has created a second disadvantage: partnerships usually
have only a limited number of members. Imagine a partnership with 100 members, each
able to bind the partnership legally to contracts and to other obligations. Of course, the
limited partnership was created to alleviate this problem, but it has not been very successful.
