In business law, a general partnership is a business entity formed by two or more persons. In addition, the general partnership form of business structure is characterized by sharing of all profits made and losses incurred in the process of operation. The partners do not enjoy limited liability. Therefore, if the firm makes a debt, the properties of the partners may be sold to settle the debt. In most countries, a general partnership is formed through an agreement or proof of existence. However, a general partnership can also be formed under estoppels whereby if a person agrees his name to be used as the business name, he or she cannot deny being a partner (Glen par.4).
The aim of this report is to discuss general partnership as a form of the business structure according to the business law.
The report is organized into a number of sections. In the introduction section, background information, aim and scope are given. The second part entails a discussion that analyzes the formation, characteristics, advantages and disadvantages in relation to a general partnership. Finally, a conclusion and recommendation are given.
This type of business structure is formed by 2 or more individuals. Before a partnership is formed, the partners have to address some of the critical issues that may affect the operation of the firm. These are stipulated in the partnership agreement. Some of the basic issues addressed include the name of the business, the duration that the business will be in operation and the purpose or the kind of business to be undertaken (Rumley par. 7). A partner’s contribution can also be in terms of assets or a loan to the company. It also indicates how additional capital which may be required in the future would be contributed. The agreement also stipulates the duties and responsibilities of every partner. That is the role of every partner and also whether they are required to be full-time committed. This helps partners to be active in the management and running of the business. The issue of profits and losses sharing and the income of each partner are also addressed.
The partnership agreement also addresses how the assets of the business should be distributed among the members upon liquidation of the business. Dissolution of the partnership may occur upon disability or death of a member (QuickMBA par. 7). Other causes which may result in the firm’s dissolution relate to the withdrawal of a partner or via a court order. Under a court order, a partnership business may be dissolved if it is illegal or it is not making profits.
However, on withdrawal of a partner, the other partners may decide not to dissolve the business but decide to purchase the withdrawing partner’s share of the business. This means that a partnership agreement comprehensively addresses the action to be taken when a partner withdraws. For example, the agreement stipulates the action be taken on the misconduct of a partner and the process of admitting a new partner is also indicated.
Before the partnership is formed, the process of settling disputes in the business is included in the partnership deed. In addition, it addresses how the business cash would be banked and all the arrangements required. The banking arrangements may involve who would be authorized to withdraw or cash money in the account and who and how to keep the firm’s books of account.
A general partnership is characterized by unlimited liability whereby the partners’ personal properties can be sold to pay off business debts. The partnership agreement clearly stipulates the basis on which profits are to be shared. However, debts are shared equally (QuickMBA par. 7). Every partner is regarded as an agent of the business and therefore, his dealings with the third parties on behalf of the business the other partners are also liable. Each partner has the right to participate in the management of the business (Krouner par.7)
Advantages of a general partnership
Formation and registration: Unlike corporations, a general partnership does not require many legal procedures. For example, it is not compulsory to register or pay any fees.
Capital contribution: unlike in the sole proprietorship, the partnership has additional funding which is contributed by the members (Glen par.4). Therefore, partnerships have a large capital and hence can grow faster than sole proprietorship businesses
Loss sharing: in a general partnership business, losses are shared among the partners and therefore each partner incurs only a portion of the loss. This is an advantage over the sole proprietorship where losses are incurred by a single person.
Sharing of duties; in general, partnership roles and responsibilities on the management and controlling of the business are shared among the partners unlike in the sole proprietorship where management is carried out by one person. Also, in partnership partners have the right to get involved in the management unlike in limited partnership where some partners are dormant (Krouner par. 5).
Disadvantages of general partnership
Slow decision making; in partnership, the decision-making process is slow because all the partners’ views have to be considered and the decision with more voters is considered the best, unlike in sole proprietorship where decisions are made by one person and hence they are fast (Rumley, p. 2).
Unlimited liability: in general partnership the partners’ assets can be liquidated to cater for the credit of the business, just as in the sole proprietorship.
Profits sharing: Profit is shared as stipulated in the partnership agreement. This limits the individual’s income since he or she does not receive the total amount as in the case of a sole proprietorship (Glen par.7).
A general partnership is easy to start and in most cases, the partners usually have a partnership agreement that stipulates how the partnership will be operated and how disputes would be settled. In addition to profit sharing and unlimited liability, the decision-making process in a general partnership is very slow. However, there are a number of advantages associated with this type of business structure such as sharing of losses. In addition, sharing duties and responsibilities makes the firm’s operation efficient by minimizing fatigue which is evident in a sole proprietorship.
A general partnership is better than a sole proprietorship form of business because there is the probability of the firm having a high capital base compared to a sole proprietorship. Despite general entrepreneurs being enticed by advantages associated with general partnership such as sharing duties and responsibilities and loss sharing, its unlimited liability makes it popular. In addition, this type of business has a slow decision-making process since every members’ consent has to be obtained. This makes the firm inefficient in taking advantage of opportunities in the environment which in most cases have a short window.
- Glen, Jerry. Starting a small business. in 2009. Web.
- Krouner, Leonard. Characteristics of New York business structures. Albany: United States Small Business Administration. 2010. Web.
- QuickMBA. Law and business: the general partnership. QuickMba. 2010. Web.
- Rumley, Rusty. General partnerships. n.d. Web