How do entrepreneurs use their resources to start businesses?
In 1988, brothers Wing Lam Lee, Ed Lee, and Mingo Lee decided to go into the restaurant business together. The brothers were surfers who had grown up in Brazil, had surfed in Mexico, and had worked in their family’s Chinese restaurant. All of these influences came together in their first restaurant: Wahoo’s Fish Taco in Costa Mesa, California. Wahoo’s featured a Mexican-Brazilian-Asian menu with grilled fish tacos as the specialty. The restaurant was so successful that by 2013, the partners had opened more than 60 Wahoo’s.
Partnerships like that of the Lee brothers are well known in the business world. Ben Cohen and Jerry Greenfield, friends since middle school, founded Ben & Jerry’s. Google, the Internet search company, was founded by partners Larry Page and Sergey Brin. Partnerships are the second most common form of business organization in the United States.
A partnership is a business owned by two or more co-owners. Partners share profits from the business. They also share liability for any debts the business incurs. Family-owned businesses, small stores, farms, and medical practices are common examples of business partnerships. Law firms, accounting firms, and money-management firms also frequently form partnership agreements.
Partnerships may be formed by an oral agreement. However, the more common practice is to draw up a legally binding written agreement. There are different kinds of partnerships, each of which confers different responsibilities on the partners. The following are the three most common kinds of business partnerships:
General partnership. A general partnership is a form of business in which all co-owners have unlimited liability for any business debts. The owners, or general partners, are also active in the operations of the business.
Limited partnership. A limited partnership has at least one general partner and one or more limited partners. The li mited partners contribute financial capital but leave day-to-day business operations to the general partners. For this reason, limited partners are also known as silent partners.
The main advantage of being a limited partner is limited liability for debts owed by the partnership. Limited partners can lose only the amount of money they invested in the business should it be sued or go bankrupt.
Limited liability partnership. In a limited liability partnership, co-owners are allowed to operate like general partners while enjoying the protection of limited liability. An LLP is well suited to businesses in which all partners want to take an active role in managing the business. Professionals, such as attorneys. doctors. dentists. and accountants, often form LLPs.
Like sole proprietorships, partnerships offer entrepreneurs a number of advantages.
Ease of start-up. Partnerships are relatively easy to establish. The same business permits that are required for a sale proprietorship are also required for a partnership. In addition, business and legal experts recommend that a legal agreement, known as articles of partnership, be drawn up. Articles of partnership usually specify
If articles of partnership are not drawn up, most states have guidelines regarding partner rights and responsibilities that automatically go into effect.
Few restrictions. Partnerships are subject to few government regulations. However, like sole proprietorships, they must meet industry-specific regulations, such as health codes.
Shared decision-making power. “Two heads are better than one” is the philosophy guiding most partnerships. Partners can pool their experience and skills in making the decisions that guide the business.
Specialization. Partners often bring different areas of expertise to a business. For instance, one partner may be good at managing people, whereas another may be a marketing whiz. Partnerships allow partners to do what each does best for the company’s overall benefit.
Individual taxation. Partners share in the profits according to whatever arrangement they have made. Each partner pays income taxes on his or her share. The business itself does not have to pay taxes.
Increased growth potential. People who go into business together each bring financial assets to the enterprise-their own assets as well as those of family and friends. Banks therefore see less risk in lending money to a partnership than to a sole proprietorship, which draws on the assets of just one person. For the same reason, suppliers are more willing to extend credit to a partnership.
With greater access to capital, partnerships often find it easier to expand their operations than do sole proprietorships. They are also better able to attract and hire talented employees, some of whom may aspire to become partners themselves some day.
Partnerships also have drawbacks.
Unlimited liability Jar general partners. Unless a partnership is a LLP, at least one partner the general partner has unlimited liability for debts. Should the business run into financial problems, general partners stand to lose not only what they have invested but also their personal assets outside the business.
Conflict between partners. Like any relationship, a business partnership has the potential for conflict. Partners who see eye to eye when they first go into business may come to disagree about management style, work habits, ethics, or the firm’s general goals and direction. Partnership agreements do not address such issues. Good communication and an honest effort to resolve conflicts are essential if a partnership is to survive.
Continuity issues. Partnerships are a temporary form of business. If one partner dies or decides to leave a partnership, the remaining partners will need to buyout the former partner’s share. The value of this share may be difficult or impossible to determine. Moreover, the remaining partners may not have the liquid assets needed to buy it. Survival may depend on finding a new partner with the financial resources to purchase the outgoing partner’s share of the business.