Conditions for settling disputes 3 Business owned jointly by two or more people

Conditions for settling disputes 3 business owned

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3. Business owned jointly by two or more people. Chapter 4 Selecting a Form of Business Ownership 182
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Unlimited Liability and the PartnershipFigure 4.3 "General Partnership and Unlimited Liability"shows that a majorproblem with partnerships, as with sole proprietorships, is unlimited liability: eachpartner is personally liable not only for his or her own actions but also fortheactions of all the partners. In a partnership, it may work according to the followingscenario. Say that you’re a partner in a dry cleaning business. One day, you returnfrom lunch to find your establishment on fire. You’re intercepted by your partner,who tells you that the fire started because he fell asleep while smoking. As youwatch your livelihood go up in flames, your partner tells you something else:because he forgot to pay the bill, your fire insurance was canceled. When it’s allover, you estimate the loss to the building and everything inside at $1.2 million.And here’s the really bad news: if the business doesn’t have the cash or other assetsto cover losses,you can be personally sued for the amount owed. In other words, anyparty who suffered a loss because of the fire can go after your personal assets.Chapter 4 Selecting a Form of Business Ownership Figure 4.3 General Partnership and Unlimited Liability 4.3 Partnership 183
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Figure 4.4 Partnerships can have many advantages, but there are disadvantages to consider as well. © 2010 Jupiterimages Corporation Limited Partnerships Many people are understandably reluctant to enter into partnerships because of unlimited liability. Individuals with substantial assets, for example, have a lot to lose if they get sued for a partnership obligation (and when people sue, they tend to start with the richest partner). To overcome this defect of partnerships, the law permits a limited partnership 4 , which has two types of partners: a single general partner who runs the business and is responsible for its liabilities, and any number of limited partners who have limited involvement in the business and whose losses are limited to the amount of their investment. Advantages and Disadvantages of Partnerships The partnership has several advantages over the sole proprietorship. First, it brings together a diverse group of talented individuals who share responsibility for running the business. Second, it makes financing easier: The business can draw on the financial resources of a number of individuals. The partners not only contribute funds to the business but can also use personal resources to secure bank loans. Finally, continuity needn’t be an issue because partners can agree legally to allow the partnership to survive if one or more partners die. Still, there are some negatives. First, as discussed earlier, partners are subject to unlimited liability. Second, being a partner means that you have to share decision making, and many people aren’t comfortable with that situation. Not surprisingly, partners often have differences of opinion on how to run a business,
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