258 PART 3 I MOV|NG FROM AN IDEA TO AN ENTREPRENEURIAL FIRM
Disadvantages of a Sole Proprietorship
l Liability on the owner`s part is unlimited.
I The business relies on the skills and abilities of a single owner to be
successful. Of course, the owner can hire employees who have additional
skills and abilities.
l Raising capital can be difficult.
l The business ends at the ow'ner’s deadi or loss of interest in the business.
l The liquidity of the owner`s investment is low,
Par'tnerships
If two or more people start a business, they must organize as a partnership,
corporation, or limited liability company. Partnerships are organized as either
general or limited partnerships.
General Partnerships A general partnership is a form of business orga-
nization where two or more people pool their skills, abilities. and resources to
run a business. The primary advantage of a general partnership over a sole
propiietorship is that the business isn’t dependent on a single person for its
survival and success. In fact, in most cases, the partners have equal say in how
the business is run. Most partnerships have a partnership agreement, which is
a legal document that is similar to a founders’ agreement. A partnership
agreement details the responsibilities and the ownership shares of the
partners involved with an organization. The business created by a partnership
ends at the death or withdrawal of a partner, unless otherwise stated in the
partnership agreement. General partnerships are typically found in service
industries. In many states, a general partnership must file a certificate of
partnership or similar document as evidence of its existence. Similar to a sole
proprietorship, the profit or loss of a general partnership flows through to the
pa.rtner`s personal tax returns. If a business has four general pa.rtners and they
all have equal ownership in the business, then one-fourth of the profits or
losses would flow through to each partner’s individual tax return.” The part-
nership liles an informational tax return only.
The primary disadvantage of a general partnership is that the individual
partners are liable for all the partnerships debts and obligations. If one partner
is negligent while conducting business on behalf of the partnership, all the
partners may be liable for damages. Although the non-negligent partners
may later try to recover their losses from the negligent one, the joint liability of
all partners to the injured party remains. lt is typically easier for a general
partnership to raise money than a sole proprietorship simply because more
than one person is willing to assume liability for a loan. One way a general
partnership can raise investment capital is by adding more partners. Investors
are typically reluctant to sign on as general partners, however, because of the
unlimited liability that follows each one.
In summary, the primary advantages and disadvantages of a general part-
nership are as follows:
Advantages of a General Partnership
l Creating one is relatively easy and inexpensive compared to a corporation
or limited liability company.
I The skills and abilities of more than one individua_l are available to the firm.
l Having more 'than one owner may make it easier to raise funds.