Partnerships

If several individuals wish to go into business together they can form a partnership. A partnership is a legal association of two or more people as co-owners of a business for profit. In most respects a partnership is similar to a sole proprietorship except that more than one owner is involved. Although a partnership, like a proprietorship, is not a separate legal entity, for accounting purposes the partnership affairs must be kept separate from the personal activities of the partners. The partners share profits, losses, and usually the management responsibilities as well. A partnership might remain a small, two-person operation, or it might grow into an international business with thousands of employees.

Partnerships are of three basic types. In a general partnership, all partners are equal by law, and all are liable for the business’s debts. In a limited partnership, one or more people act as general partners who run the business, while the remaining partners are passive investors (that is, they are not involved in managing the business). These partners are called limited partners because their liability is limited to the amount of their capital contribution. In a master limited partnership (M L P), firms act like corporations, selling partner units on a stock exchange. All partnerships are taxed at personal rates.

When a partnership is created there should be an agreement – the legal document setting forth the partners’ rights and responsibilities. A key element of the partnership agreement is the buy/sell agreement, which defines what will happen if one of the partners dies.

Partnerships are often used to organize retail and service-type businesses, including professional practices (lawyers, doctors, and accountants)

Advantages and Disadvantages of a Partnership

Advantages	Disadvantages
Combining skills and resources of two or more individuals Ease of formation Freedom from governmental regulations and restrictions Continuous life (new partners can be drawn into the business to replace those who die or retire) Profits are taxed at personal rates.	The unlimited liability of the active partners Interpersonal problems (disagreements between partners; each partner wants to be responsible for managing the business)

Corporations

A business organized as a separate legal entity under state corporation law and having ownership divided into transferable shares of stock is called a corporation. Unlike sole proprietorships and partnerships, a corporation’s legal status and obligations exist independently of its owners. They are not personally liable for the debts of the corporate entity. The ease with which stockholders may transfer all or part of their shares to other investors at any time (i.e. sell their shares in the securities market) adds to the attractiveness of investing in a corporation. Because ownership can be transferred without dissolving the corporation, the corporation enjoys an unlimited life.

Corporations have most of the legal rights of a person, including the right to conduct business, to own and sell property, to borrow money and to sue or be sued.

In a corporation, ownership and management are separate. The shareholders or owners of the company’s stock (shares in the company) elect the board of directors, who in turn elect the officers of the corporation. The corporate officers carry out the policies and decisions of the board. In practice, the real power in a corporation usually rests with its chief executive officer (CEO), who is responsible for establishing company policies and supervising the activities of the corporation.

No other form of business ownership can match the success of the corporation in bringing together money, resources, and talent, in accumulating assets, and in creating wealth. While the combined number of proprietorships and partnerships in the United States is four times the number of corporations, the revenue produced by corporations is more than two times greater. Corporations account for 70 percent of the profits earned by U.S. businesses.

A company needn’t be large to incorporate. Most corporations are relatively small. The big ones, however, are really big. The 500 largest corporations in the United States have combined sales of over $5 trillion and employ well over 10 million people.

Corporations have evolved into various types. The first distinction is whether a company is public or private. The exhibit below shows major types of corporations. The most visible corporations are the large, private ones, such as General Motors, IBM, and Coca-Cola, but other types are also common.

TYPE	DEFENITION	EXAMPLE
Government-owned corporation	Business formed by federal or state government for a specific purpose	Local school districts; Dam systems
Quasi-government corporation	Public utility with a monopoly on providing basic public services	Local phone service: electricity, water, natural, gas
Private corporation	Business owned by private individuals or companies	General Motors
Not-for-profit corporation	Charitable, educational, and fraternal organizations	Harvard University
For-profit corporation	Company in business to make a profit	IBM
S corporation	Corporation with no more than 75 owners whose profits are taxed at personal income tax rates	Inland Asphalt
Limited liability company (LLC)	Organizations that combine the benefits of S corpo­rations and limited partnerships: LLC’s existence is restricted to 30 years.	Realatech
Parent company	Company that owns most, if not all, of another company’s stock and that takes an active part in managing that other company	General Electric; 27 subsidiеries include NBC, GE Spacenet and GE Capital Services
Holding company	Company that owns most, if not all, of another com­pa­ny’s stock but that does not actively participate in the management of that other company	Intermark
Subsidiary corporation	Corporation that is entirely, or almost entirely, owned by another corporation, known as a parent company or holding company	Taco Bell, a subsidiary of PepsiCo