Answer
See explanation
Work Step by Step
Work step-by-step:
1. Read through the whole chapter, while making short notes and keeping in mind what questions might get asked in an exam.
2. Summarise the material in your own words.
3. Use those notes and your memory, to answer the questions to the best of your ability.
Question: Describe the differences between general and limited partners?
Answer:
A general partner refers to a partner who actively partakes in the management of the business’s daily operations, while a limited partner exclusively invests in the business, but takes on no management duties.
In the event that the business goes bankrupt, that general partner will be held financially responsible for the business’s bills, while the limited partner has limited liability, meaning they will not suffer any financial loss except for their initial business investment.
A partnership always has two or more co-owners. So, if a general partnership has three co-owners, all three owners share management duties and financial liability. While a limited partnership must have at least one general partner whose financial liability is unlimited in nature (or more), there will be one (or more) limited partners whose contribution is strictly financial, with limited liability.
Question: Compare the advantages and disadvantages of partnerships?
Answer:
In terms of advantages, partnerships do offer a financially more viable business option, because combining capital makes for an easier start-up and is, therefore, advantageous.
Shared expertise, whether hard or soft skills, makes for a better management team and can complement each other greatly, yielding a big advantage for partnerships.
Studies have shown that partnerships encourage accountability and discipline, so much so, that they are four times more likely to succeed - this translates directly to the business’s ability to withstand the test of time.
The tax laws surrounding partnerships are advantageous because profits are taxed as personal income per individual partner, at a normal income tax rate.
In terms of disadvantages, we can list unlimited financial liability in general partnerships, where the general partner will be held financially responsible for business debts and there is no limit to the losses they might suffer, irrelevant of which partner had a hand in causing the bankruptcy.
There is no law stipulating how profit must be divided, therefore this can lead to dissension between co-owners, thus profit disagreements can be classified as one of the possible disadvantages of partnerships.
It is advisably best for partnership terms and conditions to be clearly set out per contractual agreement, as disagreements regarding management and decision-making can arise as another possible disadvantage.
Winding up a partnership agreement can be a lengthy and costly process, due to all partners’ contrasting expectations of what each individual believes is due to him or her. Therefore, the difficulty associated with partnership termination is a disadvantage.
