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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