Partnership

A partnership is a legal association of two or more persons as co-owners of an unincorporated

business. A partnership is formed with the purpose of eliminating some of the disadvantages
of sole proprietorships while retaining some of their advantages.
 
Advantages of Partnerships
Partnerships have advantages pertaining to the following:
1. ease of formation;
2. pooling of knowledge and skills;
3. more sources of capital;
4. ability to attract and retain employees; and
5. tax advantage.
 
Ease of Formation
The only requirement before the partnership starts to operate is for the partners to agree on
basic aspects of the business like the nature of the business, location, capitalization, and the
like.
 
A written agreement called partnership agreement is drawn to formalize what has been
agreed upon.
 
Pooling of Knowledge and Skills
The combined knowledge and skills of the partners provide the partnership with a distinct
advantage. These skills may be used to the advantage of the partnership. This condition leads
to specialization which is a very important competitive tool in business.
 
More Sources of Capital.
The combined resources of the partners provide a bigger source of funding. Also, the
partnership can enjoy the benefits of a higher credit rating. A combination of the resource
potentials of the partners and a high credit rating is regarded as a formidable financing
capability of the firm.
 
Ability to Attract and Retain Employees
Partnerships are able to overcome this difficulty by offering partner status to valuable
employees. This advantage also minimize the potential harm that may be done when a key
employee moves over to another firm.
 
Tax Advantage
The income of the partnership is not taxed separately from the partners'
incomes. Any profits derived by the partners are taxed as their individual incomes.
 
Disadvantages of Partnerships
Operating partnerships are hindered by the following disadvantages:
1. unlimited liability;
2. limited life;
3. potential conflict between partners; and
4. difficulty in dissolving the business.
 
Unlimited Liability
Partnerships, like sole proprietorships, are saddled with the disadvantage of unlimited
liability. Although one or more partners may opt to have limited liability, the remaining
partner carries the burden of unlimited liability.
 
Limited Life
When a partner dies or withdraws from the business, the partnership is terminated. This is so
because the life of a partnership depends on the state of health and the willingness of the
partners to continue.
 
Potential Conflict Between Partners
There are occasions when partners disagree on certain ways of operating the business, and
there are many potential areas for disagreement.
Among these are the following
 adding new products or services carried by the business;        
 hiring new employees;
 decisions on credit extensions; and
 the grant of additional benefits to employees.
 
When conflict between partners persists, operations are affected. The condition may even lead
to bankruptcy.

Difficulty in Dissolving the Business

Partnerships are not as easy to dissolve as sole proprietorships. In a partnership dissolution, it
may not be easy to divide whatever assets are left for distribution to the partners as some of
the assets may be fixed or immovable.
 
The more difficult the dissolution becomes when certain debts are to be shared by the
partners.
 
Types of Partnerships
Partnerships may be classified according to the liability of the partners.
 general partnership; and
 limited partnership.
 
A general partnership is an association of two or more persons, each with unlimited
liability, and who are actively involved in the business.
 
A limited partnership is an arrangement in which the liability of one or more partners is
limited to the amount of assets they invested in the business.
 
Partnership Agreements
The possibility of disagreement between partners is always present in a partnership. There are
certain operational concerns that could be the subject of disagreement. Disagreement
oftentimes negatively affects employee morale and work attitude. It is important for the firm
to be spared of such difficulties.
 
The partnership agreement is a document designed to prevent or at least minimize
disagreements between partners. It usually covers the following:
1. purpose of the business;
2. terms of the partnership;
3. goals of the partners and the partnership;
4. financial contribution made by each partner at the beginning and during the
lifetime of the business;
5. distribution of profits and losses;
6. withdrawal of contributed assets or capital by a partner;
7. management powers and work responsibilities of each partner;
8. provisions for admitting new partners;
9. provisions for expelling a partner;
10. provisions for continuing the business in the events of a partner's death, illness,
disability, or withdrawal;
11. provision for determining the value of a departing partner's interest and method
of payment of that interest;
12. methods of settling disputes through mediation or arbitration; and
13. duration of the agreement and the terms of dissolution of the business.