PARTNERSHIP

A partnership is a legal organization in which two or more individuals own and operate the business. Partnerships are not limited as to the number of possible partners or the number of employees. Generally, however, partnerships are small in size. Partnerships are a common form of organization in the professions (businesses such as retail shops and service trades like car repair shops) and in wholesale firms (which buy from producers and sell to retailers).

Businesses organized as partnerships are advantageous for several reasons. No formal legal process is required to start a partnership, but most are based on signed agreements between partners as to how the costs and profits will be divided. Although certain licenses or permits may be required, few fees are to be paid or papers filed with government agencies. Owners may have a great deal of flexibility and freedom in decision making. Also, instead of working for someone else and receiving a salary, the owners may keep all the profits to do with as they see fit. The talents and abilities of more than one person will be available to the business, and, with several individuals backing the firm, bank loans may be easier to obtain.

The largest economic disadvantage of partnerships is unlimited liability. The owners are personally responsible to the full extent of whatever wealth they own for all the debts of the business, both jointly and separately. This means that if one individual owns 1/4 of a firm and the firm goes out of business with debts of $400,000, the individual is liable for $100,000. However, if the other three partners disappear, the one remaining would be liable for the entire $400,000 (and even personal possessions may be taken to satisfy creditors). The actions of any one partner are the legal, unlimited responsibility of all partners. Another disadvantage is the limited ability to raise enough capital for the business to grow, be efficient, and highly profitable. In most cases raising sufficient investment capital is problematic.

In the United States during the 1980s and the 1990s, the percentage of total firms organized under partnerships and their sales remained relatively constant. In 1993 partnerships made up 6.9 percent of all U.S. firms and represented 1,467,000 businesses; they received 4.8 percent of total sales, about $627 billion.