Business partnerships are basically of two types, General Partnerships and Limited Partnerships. In a general partnership all partners are equally responsible for the management of the business and share of profits unless otherwise stated in a partnership agreement. Business partnerships are easy to form and operate. There are no legal or statutory formalities involved in the formation of a business partnership. Likeminded people can get together and start a business. When the partnership business is by intent, all partners are considered equal in rights and responsibilities. Regardless of what each partner has invested in the business, all partners have equal right to the profits and are personally liable to all business obligations and debts. General partnership interests can be structured in any way the partners have mutually agreed to or set down in a partnership agreement.
Most states follow the Revised Uniform Partnership Act in the matters of business partnership law. As partnerships are formed between persons for profit-for-businesses and as state and federal laws broadly define “business” and “persons”, the partnership business operations are supposed to be adequately covered under those laws. Specific partnership laws or acts have not been enacted due to this reason.
The advantages of a business for profit partnership are that it involves no formalities in formation and have great flexibility in organization and management. If your business is small and does not involve too many potential risks, partnership is an ideal business structure for two or more persons to jointly do business. It offers benefits in taxation and other statutory formalities also.
The main disadvantage of a partnership business is that the business owners are personally open to all business risks and obligations of the partnership except in a limited partnership. All partners are jointly and severally liable to settle all business obligations and debts of the partnership. They will be held equally responsible for the partnership activities regardless of anything to the contrary in the partnership agreement. If the partnership defaults payments to its creditors and lenders or if a liability or claim arises due to an action or inaction of the partnership, every partner’s personal assets can be appropriated to settle the creditors or the claim. Another disadvantage of a partnership is the continuity of the business. If any of the partners become disabled or deceased, the partnership will get automatically dissolved.
Now the reasons for why incorporate will be apparent. Personal liability and continuity of the business is at risk in a business partnership. The personal liability of shareholders in a corporation is limited and does not affect personal property. Corporations are “forever’ meaning it is not dependent on its shareholders for its continuity.
