Text 4 The Partnership

A logical way to increase to capital available to a firm is to increase the number of owners. A partnership is a legal relation existing between two or more persons contractually associated as joint principals, or persons entitled to the profits and liable for the debts of a business. The key elements of a partnership are community of interest and sharing of profit.

A partnership is usually based upon a partnership agreement (i.e., a contract). In the US, a written agreement is usually required only if the partnership must continue for more than one year, or deals with third persons in real estate. A partnership is composed of several owners who pool their resources together to form the firm. The partners agree among themselves about how much capital each is to contribute, what role each will play in the management, and how much each will share in the profits. In the US, partners can be divided into general partners, i.e. persons who have management responsibilities and full liability for the partnership debts, and limited partner who make contributions of cash or other property but are not involved in the daily management of the business, and whose liability is limited to the amount of their contribution. Hence, there are “general” and “limited” partnerships. Note that the limited partnership must have at least one general partner.

The partnership contract legally defines the duties and the responsibilities of the partners to each other. A partner’s rights are: rights in specific partnership property, interest in partnership, right to participate in management. Each partner is an agent of the partnership for the purposes of its business, and each partner may execute transactions which bind the partnership. Partners are jointly liable for partnership debts and contracts. Between themselves, partners are fiduciaries (i.e. persons, whose relations are based on trust). Thus partners must account to each other for profits, refrain from engaging in competitive business without other partners’ concert and hold partnership assets in their own name. Books and records must be made accessible to all partners. Profits are divided per agreement (with losses in the like proportion).

As far as the public is concerned, however, each of the partners has the legal status of a sole proprietor. Each partner can sign contracts for the firm, can buy or sell goods or assets belonging to the firm, can borrow or lend, on the firm's behalf, and can commit the firm just as a sole proprietor could. Such a commitment is legally binding on the firm and on all the other partners as owners of the firm, whether they agree to it or not. Moreover, each partner is fully liable for all the firm's debts, just as if he were the sole owner. If the firm fails, leaving assets inadequate to cover its debts, creditors can sue any partner individually to collect the balance due. The legal responsibility of partners for each other’s acts necessarily confines partnerships to small groups of people with complete confidence in one another. For this reason partnerships rarely grow large enough to apply modern production methods.

A partnership is doomed to failure when partners have very different ideas about what constitutes ethical business behaviour.

Changing ownership of a partnership is even more of a problem than it is for a sole proprietorship. Unless otherwise provided by the agreement of partners, a partnership can be dissolved upon the expiration of the partnership term, expulsion, withdrawal or admission of a partner and death or bankruptcy of a partner. Any or all partners can affect its dissolution merely by expressing their will to do so. If a partner demands an early dissolution of a partnership for fixed term he may be liable for losses caused by the dissolution.

The dissolution doesn’t terminate partnership immediately, partnership relationship continues until the business is wound up. Conversely, a new partnership can be formed to carry on the business of the previous partnership. Still, since partnerships are formed by a legal contract among the owners, the withdrawal of any partner requires that the business be completely reorganized.

A partnership is automatically terminated by the death of a partner, and must be reorganized as a new firm.

Assignments to text 5:

1. Read the following and add some ideas about how to become a small business owner.

2. Do you agree that information is power?

3. What information sources can help a small business owner in Russia?

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