Page 119 - DMGT310_ENTREPRENEURSHIP_AND_SMALL_BUSINESS_MANAGEMENT

Entrepreneurship and Small Business Management

Notes The abilities and contributions of each party to the partnership, and
The control each partner has over the partnership income and the purposes for which the
income is used.

Advantages

Following are the advantages of joint partnership form of business:

1. Greater Opportunity for Business: A partnership, by virtue of combining the credit potential
of the various partners, has an inherently greater opportunity for business credit than is
generally available to a sole proprietorship.
2. Tax Advantages: As with the sole proprietorship, there may be certain tax advantages to
operation of a business as a partnership, as opposed to a corporation. The profits generated
by a partnership may be distributed directly to the partners without incurring any double
tax liability, as is the case with the distribution of corporate profits in the form of dividends
to the shareholders. Income from a partnership is taxed at personal income tax rates. Note,
however, that depending on the individual tax situation of each partner, this aspect could
prove to be a disadvantage.
3. A Simple Form of Business: For a business in which two or more people desire to share in
the work and in the profits, a partnership is often the structure chosen. It is, potentially, a
much simpler form of business organization than the corporate form. Less start-up costs
are necessary and there is limited regulation of partnerships.

Disadvantages

Following are the disadvantages of joint partnership form of business:
1. Potential for Conflict between Partners: The disadvantages of the partnership form of
business begin with the potential for conflict between partners. Of all forms of business
organization, the partnership has spawned more disagreements than any other. This is
generally traceable to the lack of a decisive initial partnership agreement that clearly
outlines the rights and duties of the partners.
2. Unlimited Personal Liability: A further disadvantage to the partnership structure is that
each partner is subject to unlimited personal liability for the debts of the partnership.

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Caution The potential liability in a partnership is even greater than that encountered in a
sole proprietorship.
3. Legal Liability: Related to the business risks of personal financial liability is the potential
personal legal liability for the negligence of another partner. In addition, each partner
may even be liable for the negligence of an employee of the partnership if such negligence
takes place during the usual course of business of the partnership. Again, the attendant
risks are broadened by the potential for liability based on the acts of other persons. Of
course, general liability insurance can counteract this drawback to some extent to protect
the personal and partnership assets of each partner.
4. Lack of Continuity: Again, as with the sole proprietorship, the partnership lacks the
advantage of continuity. A partnership is usually automatically terminated upon the
death of any partner. A final accounting and a division of assets and liabilities is generally
necessary in such an instance unless specific methods under which the partnership may be
continued have been outlined in the partnership agreement.

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