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CH 3] Business 101 3-7

it to resellers in the United States. Joint ventures are often used in real estate
investments. This type of partnership is often used in international business ventures.

Advantages of Partnerships. Partnerships are easy to form, offer broader
management skills, expanded financial resources and tax advantages. It is relatively
easy to establish a partnership. As with sole proprietorships, the legal requirements
usually involve filing a fictitious business name statement and acquiring any and all
necessary municipal licenses. Limited partnerships must also comply with state
legislation based on the Uniform Limited Partnership Act, which define the
requirements for this type of business organization.
Partnership agreement. A partnership may be formed on a handshake or be based
on a childhood friendship. However, it is best to establish written articles of
partnership specifying the details of the partners' agreement. This clarifies the
relationship within the firm and protects the original agreement upon which the
partnership is based. Even though partnerships are formed, and survive, on the basis of
mutual trust, it is best to have a written agreement. 3
Broader management base. A common reason for setting up a partnership is to
take advantage of complementary managerial skills. People involved in sole
proprietorships have their strengths and weaknesses. By reorganizing the firms in a
partnership, each is in a position to take advantage of the other’s strength. For
example, a general partnership might be formed by an accountant, an architect, and a
real estate broker who plan to develop real estate and sell homes. If additional
managerial and supervisory talent is needed, it may be easier to attract people as
partners than as employees.
Expanded financial resources. Partnerships offer an expanded financial base
through the money invested by each of the partners. This is an expanded source of risk
capital and because each partner is contributing to a larger pool of money.
Partnerships, also, usually have greater access to borrowed funds than do sole
proprietorships. Because each general partner is subject to unlimited financial liability,
financial institutions are often more willing to advance loans to partnerships.

Disadvantages of Partnerships. As with other forms of business ownership,
partnerships have their disadvantages, including being able to find suitable partners,
unlimited financial liability for general partners, lack of continuity, and divided
authority. Each general partner is responsible for the debts of the firm, and each
individual is legally liable for the actions of the other general partner(s).
Suitable partners. Finding suitable partners for a business is not the same as
finding teammates for a baseball team. The hours are different, the commitment is
different and each individuals’ strengths is different. Personnel and personality
conflicts occur, even in partnerships. All partnerships, from law firms to rock-and-roll
bands, face the problem of personal and business disagreements among its participants
on a wide range of areas that include: who does what, where responsibilities begin and
end and what products to produce or market. In some cases, if these conflicts cannot
be resolved, it is sometimes best to dissolve the partnership.
Unlimited liability. As with sole proprietorships, general partners have unlimited
liability and may be required to pay the balance of debt owed by a partnership when
the assets of the partnership business are not sufficient for the debts. This liability is
shared equally and unequally, that is if even one partner contributed less than any
other partner, that partner may be liable for repayment that exceeds his apportioned
financial contribution to the partnership. Even if there is only one partner that has any
personal wealth, that partner may be required to pay the entirety of the partnership
debt.
In a limited partnership, limited partners are protected from this pass-through debt
liability. As long as a limited partner plays no active management role in the business
activities, the limited partner’s risk is only the amount of capital that he invested in to
the partnership. Thus, a limited partner enjoys limited liability.
Continuity. Partnerships suffer the same issues regarding Continuity as a sole
proprietorship. If one general partner dies, the general partnership is dissolved. For its
business activities to continue, a new partnership needs to be formed. For practical
purposes, on the death of a partner, the business doors close and re-open as quickly as
you have read this sentence. The reason is that no one wants a profitable business to

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