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Unformatted text preview: ds for business expansion. Sole
proprietors do not find borrowing
funds easy, because lenders are not eager
to lend funds to business firms whose
success depends on one person. The sole
proprietor’s sources of money are often
limited to personal funds and the funds
of close friends and family members. 3. Sole proprietorships usually end with the
retirement or death of the proprietor;
they have a limited life. When the owner
of a sole proprietorship dies, the business “dies” as well. From the point of
view of the business community and the
firm’s employees, this factor is a disadvantage. Employees usually like to work
for firms that offer some permanency
and the possibility of moving upward. Partnerships
A partnership is a business that is
owned by two or more co-owners, called
partners, who share any profits the business earns and are legally responsible for
any debts incurred by the firm. You may
think of a partnership as a proprietorship
with more than one owner. Partnerships
include such businesses as some medical
offices, law offices, and advertising agencies. Approximately 2.3 million partnerships operate in the United States.
Advantages of Partnerships The advantages
of partnerships include the following:
1. In a partnership, the benefits of specialization can be realized. If, for example,
one partner in an advertising agency is
better at public relations and another is
better at artwork, each can work at the
tasks for which he or she is best suited.
The ad agency then has a better chance
of succeeding than if only one person
2. The profit of the partnership is the
income of the partners, and only personal income taxes apply to it. The
owners of a partnership, like the owner
of a sole proprietorship, pay only personal income taxes. Corporate income
taxes do not apply.
Disadvantages of Partnerships Partnerships
also have some disadvantages, which
include the following:
1. There are two types of partners, general
partners and limited partners. General
partners are partners who are responsible for the management of the firm.
They face unlimited liability, just as sole 162 Chapter 7 Business Operations 07 (154-185) EMC Chap 07 11/17/05 5:14 PM Page 163 proprietors do. However, unlimited liability is even more of a disadvantage in
a partnership than it is in a sole proprietorship. In a sole proprietorship, the
proprietor incurs his or her own debts
and is solely responsible for them. In a
partnership, one general partner might
incur the debts, but all general partners
are responsible for them. For example,
suppose partner Matson incurs a debt
by buying an expensive piece of medical
equipment without the permission of
partners Bradbury and Chan. This is
too bad for partners Bradbury and
Chan. They are still legally responsible
for the debts incurred by Matson.
Although a general partner has
unlimited liability, a limited partner
does not. The liability of a limited partner is restricted to the amount he or she
has invested in the firm. Limited part...
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This document was uploaded on 01/16/2014.
- Winter '14