A partnership refers to the kind of business operations that exists between two or more people who share the management functions alongside the profits and losses of the business. Despite the federal government recognizing the existence of various types of partnerships, two of them are the most common forms of organizations. These types of companies are general and limited partnerships (Meyer, 2014). In general partnerships, the partners manage the company by running various responsibilities within the business. However, in a limited partnership, there exist general and limited partners; general partners assume the liability of the business while limited partners only serve the role of investors (Meyer, 2014). Therefore, the most investor has decided to become partners in a limited partnership instead of purchasing stock in an open corporation as per the reasons explained below.
The first reason why investors have prioritized the idea of becoming a partner in a limited partnership business is attributed to the limited liability limits that they obtain. Becoming a partner in a limited partnership business enables the investors to have limited responsibility for the debts of this form of business (Meyer, 2014). This means that the debts of the business can be shared among these partners to the extent of the shares invested in the business. Their private properties will not be interfered with in the cause of settling the debts of the business (Sensoy, Wang & Weisbach, 2014). Moreover, the investors do not incur the total losses of the firm; rather the losses are equally distributed among the partners. Therefore, this reduces the burden of settling the debts of the business as it is spread across the partners.
Besides these, the investors within this kind of business have no turnover issues in cases where they decide to leave the business. When the investors want to exit the business, they can be replaced with other willing investors without the dissolution of the partnership business (Sensoy, Wang & Weisbach, 2014). Besides this necessitating the efficient and proper functioning of the market, the investors have the freedom to choose between leaving the organization and staying. Therefore, the partnership business is assured of stability since dissolution causes some of form of physical, financial, and psychological instability within the organization (Gregory, Jeanes, Tharyan, & Tonks, 2013).
Various reasons have prevented investors from purchasing stock of an open corporation. Firstly, by buying this kind of stock exposes these investors to the risks of being general partners. In this case, they are required to take the shield of all the burdens of the business's debts and obligations (Gregory et al., 2013(Gregory et al., 2013(Gregory et al., 2013(Gregory et al., 2013). This means that when the company is sued because of bankruptcy, the investors will be required to use their wealth and resources in settling all the debts and liabilities incurred by the partnership form of business (Sensoy, Wang & Weisbach, 2014). Besides these, the investor will be required to take part in the daily operations of the company. This will entail making decisions on behalf of the company and hence assume the responsibility for their decisions.
Moreover, purchasing the stock of an open corporation will expose the investors to compliance challenges. These investors will be required to hold meetings and produce a detailed partnership agreement of the business (Gregory et al., 2013). Therefore, the investors may have challenges in abiding with the agreement they drafted. This is because of the dynamic nature of the employees working within the partnership business who have various references and choices (Gregory et al., 2013). These decisions may be contrary to the expectations of the investors and hence causing the business to experience technical challenges as a result of failing to comply with the set rules and regulations.
Gregory, A., Jeanes, E., Tharyan, & Tonks, (2013). Gregory, A., Jeanes, E., Tharyan, R., & Tonks, I. (2013). Does the stock market gender stereotype corporate boards? Evidence from the market's reaction to stakeholders' trades. British Journal of Management, 24(2), 174-190.
Meyer, T. (2014). The Limited Partnership as Part of the Humanity's DNA. In Private Equity Unchained (pp. 62-79). Palgrave Macmillan UK.
Sensoy, B. A., Wang, Y., & Weisbach (2014). Limited liability performance and the maturing of the private industry. Journal of Financial Economics, 112(3), 320-343.
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