Partnership (business)
A partnership in business is an arrangement where two or more individuals or entities collaborate to achieve mutual benefits. This collaborative effort allows partners to share responsibilities and liabilities, facilitating tasks that may be unmanageable individually due to resource or expertise constraints. There are various forms of partnerships, including general partnerships, limited partnerships, and limited liability partnerships (LLPs), each presenting different implications for liability and control over business operations. General partnerships involve equal roles and shared liability, meaning partners' personal assets may be at risk for partnership debts. In contrast, limited partnerships designate one general partner who manages the business and is fully liable, while limited partners have restricted control and liability. LLPs offer a blend of management participation and liability protection, which has made them increasingly popular. However, partnerships require careful navigation of ethical and legal obligations, especially concerning conflicts of interest, to maintain trust and ensure long-term success. Overall, partnerships aim to enhance capabilities through collaboration, allowing partners to leverage collective strengths for greater achievements.
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Partnership (business)
Within the business world, a partnership is an arrangement in which two or more individuals or entities agree to combine their efforts for mutual benefit. In the most typical forms of partnership, partners share responsibilities and, to a certain extent, share each other’s liabilities. The incentive for doing this is that the partnership allows all of the partners to accomplish tasks that they could not achieve independently, usually because they lack either the requisite expertise or the resources. In the United States, business partnerships are governed by the laws of individual states, since there is no general law at the federal level that controls the conduct partnerships may engage in. However, business partnerships are controlled by federal taxation laws. There are several different forms of business partnership, and each of these offers its own costs and benefits, which businesspersons must weigh according to the needs of their particular situations.
Brief History
The three main types of business partnership are the general partnership, the limited partnership, and the limited liability partnership. A fourth type of partnership, a limited liability limited partnership is not recognized by all states. In a general partnership, each partner has an equal role in the governance of the business and an equal right to represent the business in dealings with others. The partnership’s liabilities and debts are also shared equally by all partners, a fact which leads many considering the formation of a business partnership to choose some other form of affiliation. This is because sharing equal responsibilities for partnership liabilities, in a general partnership, extends to the partners’ personal assets. In other words, if a general partnership is formed by three acquaintances and is forced to declare bankruptcy some time later, the creditors of the partnership are entitled to seek repayment of the partnership’s outstanding debts by seizing the personal assets of each partner, whether or not that partner was personally responsible for the events which brought about the bankruptcy. This degree of exposure represents more risk than many businesspeople are willing to take on, which explains the fact that general partnerships are entered into much less frequently than they were in the past. General partnerships were one of the first forms of partnership to come into use, but they have since been supplanted by more modern versions which offer greater flexibility and security.
One of these newer forms of partnership is the limited partnership. In a limited partnership, there is at least one partner who is designated a general partner, and one or more other partners who are designated as limited partners. The general partner in a limited partnership, like any partner in a general partnership, has authorization to act on behalf of the partnership, make partnership management decisions, and to represent the partnership when entering into contracts. The general partner is also personally liable for all of the debts and liabilities of the partnership. The limited partners, on the other hand, are "limited" because they have limited control over the activities of the partnership and their own personal liability for debts of the partnership is likewise limited. Finally, rather than equally sharing in the profits of the partnership as general partnership partners do, limited partners in a limited partnership instead are paid dividends by the general partner, in a manner similar to the means used to distribute dividends to shareholders.
A third option for businesspeople sharing resources is to form a limited liability partnership. In a limited liability partnership, each partner is protected from bearing responsibility for the liabilities of the partnership, in a manner similar to the way shareholders in a corporation are insulated from liability. Unlike shareholders, however, limited liability partners are able to participate in the management of the activities of the corporation. This often represents the best of both worlds for businesspeople seeking to maintain control while limiting risk, so limited liability partnerships (LLPs) have become extremely popular in recent years.
Overview
Some challenges frequently encountered in business partnerships concern the partners’ ethical and legal duties to one another and to the partnership, as well as the need to avoid actual or perceived conflicts of interest. A conflict of interest arises when one or more partners stands to obtain a personal benefit as a result of the partnership taking a particular course of action. For example, several associates might form a partnership for the purpose of operating a travel agency specializing in ocean cruises. One of the partners might have a separate business on the side in which she constructs, rents, and sells hot air balloons. If she were at some point to suggest to her partners that the partnership’s cruise lines should begin offering hot air balloon rides during their voyages, this would create a potential conflict of interest, because her suggestion makes it appear that she wants the partnership to obtain its hot air balloons from her company, which would generate additional profits for her. If she were to convince her partners to begin the hot air balloon service and to use her company, this would likely rise to the level of an actual (as opposed to potential) conflict of interest.
It is important for business partners to treat each other fairly and not seek to advance their own personal interests ahead of the partnership’s interest. The whole purpose of a partnership, regardless of which type is chosen, is to allow the partners to accomplish more together than they could individually. Allowing partners to take advantage of each other directly contravenes this purpose, and would be the type of conduct that could very easily lead to the dissolution of the partnership by the other partners, and might even result in the partners who feel they have been wronged suing their former partners to recover compensation in the form of monetary damages. If, instead of self dealing, partners choose to remain faithful to their purpose and act in the best interests of the partnership even when doing so fails to maximize their own individual interests, then over the long run the partnership has a better chance of surviving and of returning a profit to all of the partners. Partners in this type of situation also tend to enjoy greater levels of security and stability in their business, because they are not forced to rely on themselves for everything—they can share the work with their partners and benefit from their combined abilities.
Bibliography
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