Introduction to Business Organization (part B)
by
Charles Lamson
Partnership
A partnership is a voluntary association of two or more people who have combined their money, property, or labor and skill, or a combination of these, for the purpose of carrying on as co-owners some lawful business for profit. The agreement of individuals to organize the partnership and run a business forms this type of organization. The individuals who have formed a partnership and constitute its members are called partners. They act as agents for the partnership.
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The partnership must be formed for the purpose of operating a lawful business. The attempt to form a partnership to operate an unlawful business does not result in a partnership. Furthermore, a partnership may not be formed for the purpose of conducting a lawful business in an illegal manner.
A hunting club, a sewing circle, a trade union, a chamber of commerce, or any other nonprofit association cannot be treated as a partnership because the purpose of a partnership must be to conduct a trade, business, or profession for profit.
Classification
Several different kinds of partnerships exist depending on the liabilities of the partners and the business carried out. Partnerships may be classified as follows:
Ordinary or General Partnerships. An ordinary or general partnership forms when two or more people voluntarily contract to pool their capital and skill to conduct some business undertaking for profit. An ordinary partnership results and no limitations upon a partner's rights, duties, or liabilities. The Uniform Partnership Act governs this type of business organization in most states. This act aims to bring about uniformity in the partnership laws of the states.
Limited Partnerships. A limited partnership is one in which one or more partners have their liability for the firm's debts limited to the amount of their investment. This type of partnership cannot operate under the common law or the Uniform Partnership Act. However, all states now permit limited partnerships. Most do so because of passage of the Uniform Limited Partnership Act or the revised Uniform Limited Partnership Act. A limited partnership cannot be formed without a specific state statute prescribing the conditions under which it can operate. If the limited partnership does not comply strictly with the enabling statute, courts hold it to be an ordinary partnership.
Trading and Nontrading Partnerships. A trading partnership is one engaged in buying and selling merchandise. A nontrading partnership is one devoted to providing services, such as accounting, medicine, law, and similar professional services. The distinction matters because the members of a nontrading partnership usually have considerably less apparent authority than the partners in a trading partnership. For example, one partner in a nontrading partnership cannot borrow money in the name of the firm and bind the firm. One dealing with a nontrading partnership must exercise more responsibility in ascertaining the actual authority of the partners to bind the firm than a person dealing with a trading partnership.
Who May Be Partners?
As a contractually based entity, any person competent to make a contract has the competence to be a partner. A minor may become a partner to the same extent to which the minor may make a contract about any other matter. The law holds such contracts voidable, but a minor acting as the agent of the other partner or partners can buy in the partnership on contract within the scope of the partnership business. A minor partner also incurs the liabilities of the partnership. The states disagree as to whether a minor who withdraws from a partnership can withdraw the entire contribution originally made or whether a proportion of any losses must first be deducted.
Kinds of Partners
The members of a partnership may be classified as follows:
General Partner. A general partner is one actively and openly engaged in the business and held out to everyone as a partner. Such a partner has unlimited liability and respect to the partnership debts. A general partner appears to the public as a full-fledged partner, assumes all the risks of the partnership, and does not have any limitations of rights. This is the usual type of partner.
Silent Partner. A silent partner is one who, though possibly known to the public as a partner, takes no active part in the management of the business. In return for investing in the partnership capital, such a partner has a right as a partner only to share in the profits and the ratio agreed upon. Why would a person invest money but take no active part in the management? A person would do this because such a partner gains limited liability and no share of the losses beyond the capital contribution. People frequently referred to this type of partner as a limited partner when known to the public as a partner.
Secret Partner. An active partner who attempts to conceal that fact from the public is a secret partner. Such a partner tries to escape the unlimited liability of a general partner but at the same time takes an active part in the management of the business. Should the public learn of such a partner's relationship to the firm, however, unlimited liability cannot be escaped. Secret partners differ from silent partners in that secret partners: (1) are unknown to the public and (2) take an active part in the management of the business. Secret partners may feign the status of employees or may work elsewhere, but they meet frequently with the other partners to discuss management problems.
Dormant Partner. A dormant partner sometimes referred to as a sleeping partner usually combines the characteristics of both the secret and the silent partner. A dormant partner is usually unknown to the public as a partner and takes no part in the management of the business of the firm. When known to the public as a partner, a dormant partner has liability for the debts of the firm to the same extent as the general partner. In return for limited liability so far as the other partners can provide it, a dormant partner forgoes the right to participate in the management of the firm. In addition, such a partner may agree to limit income to a reasonable return on investment, since those services are contributed.
Nominal Partner. Nominal partners hold themselves out as partners or permit others to do so. In fact, however, they are not partners, since they do not share in the management of the business or in the profits; but in some instances they may be held liable as a partner.
Advantages of the Partnership
By the operation of a partnership instead of a proprietorship, capital and skill may be increased, labor may be made more efficient, the ratio of expenses per dollar of business may be reduced, and management may be improved. Not all of these advantages will accrue to every partnership, but the prospect of greater profits by reason of them leads to the formation of a partnership.
Disadvantages of the Partnership
A partnership has the following disadvantages:
Organizations Similar to Partnerships
Some business organizations resemble partnerships. However, they differ from them. These include joint stock companies, joint ventures, and limited liability companies.
Joint-Stock Companies. A joint-stock company resembles a partnership, but shares of stock, as in a corporation, indicate ownership. The ownership of these shares may be transferred without dissolving the association. Thus, one of the chief disadvantages of the general partnership is overcome. Shareholders in a joint-stock company do not have the authority to act for the firm. The joint stockholders have liability, jointly and severally, for the debts of the firm while members. For this reason, joint-stock companies do not offer the safeguards of a corporation. Some states permit joint-stock companies to operate by special statutes authorizing them, or in some states, without statute, as common law associations.
Joint Ventures. A joint venture is a business relationship in which two or more persons combine their labor or property for a single undertaking and share profits and losses equally or as otherwise agreed. For example, two friends enter into an agreement to get the rights to cut timber from a certain area and market the lumber. A joint venture resembles a partnership in many respects. The primary difference is that a joint venture exists for a single transaction, though its completion may take several years. A partnership generally constitutes a continuing business.
Limited Liability Companies. Some states have enacted statutes providing for the formation of a business organization run like a partnership but without the disadvantage of unlimited liability. This is a limited liability company or LLC. The owners, who also run the LLC, are called members. The initial members sign an operating agreement or articles of organization, the contract that governs the operation of the LLC. This contract must be filed with the appropriate state office. Most states require two members for an LLC, which may be formed for any legal business purpose.
*SOURCE: LAW FOR BUSINESS, 15TH ED., 2005, JANET E. ASHCROFT, J.D., PGS.377-381*
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