Question

Explain why traditional partnerships should be considered malpractice. Include possible alternatives and make sure to emphasis on why these are currently dangerous.

Answer 1

Traditional partnerships is the partnership when two or more people come together to start a business for making profit.

Partners distribute the profit according to their share in the business and accordingly pay taxes.

The reasons why traditional partnership is considered as a malpractice is as follows:

Partnership is not a separate entity. Is had its existence from its partners.

There is a unlimited liability on the partners. That means if the business would have to be dissolved then partners have to fulfill the money from their personal belongings till the debt is not cleared. This way one partner could loose all his personal belongings.

So this was the major reason why it was considered as malpractices.

Whatever share a partner had in the business, at the time of dissolution, they have no limit on how much to pay back. Even if only one member is having enough property and one has nothing, one who is having the property will pay all debts by selling his own properties.

So we can see this was not at all fair. Therefore it was not good to practice traditional partnership

To avoid this there is an alternative of entering into limited liability partnership. In this, every partner has made agreement to pay a limited amount to the business. At the time of business being liquidated, each partner has to pay only the amount he has agreed to pay and if any money other than that if he owes to business. Other than this he does not need to pay anything extra from his belongings.

This way it will save the person from being insolvent which happened in traditional partnerships.

So we saw how limited liability partnership help eradicate this problem of traditional partnership.

Now a days people are doing limited liability partnership rather than traditional partnerships because LLP has more specified agreements where people have less chance of being caught in any type of fraud. Therefore we can say, LLP has replaced traditional partnership.