Question

Scenario: Sports Memorabilia Store

Farah and David decide to form a sports memorabilia retail partnership. They have known each other since business graduate school and have always worked well together on various projects. The business is doing well but cash flow is very tight. Farah takes several calls from vendors asking for payment. He believed David had been paying the bills. When he asks about this, David admits to embezzling from the partnership.

• What liability does Farah face as a result of the theft?
• Are you for or against a partnership? Please explain.

Answer 1

Answer-

A partnership is recognized as a legal entity separate from its owner for state law purposes. There are several different types of partnerships, including:

· General Partnership – A partnership with only general partners. Each general partner takes part in the management of the partnership and is personally liable for obligations of the partnership

· Limited Partnership – A partnership with both general and limited partners. General partners manage the partnership and are personally liable for partnership obligations. Limited partners do not participate in the day-to-day management of the partnership and are not personally liable for partnership obligations.

· Limited Liability Partnership – A limited liability partnership is a hybrid form of partnership in which each partner can participate in the day-to-day management of the partnership, but without personal liability. It is similar to a limited liability company.

Partnerships are formed by agreement between the partners. General partnerships can often be formed without any need to file documents with the state. Limited partnerships and limited liability partnerships usually require a certificate of partnership to be filed with the state.

Owner Liability for Entity Obligations

The liability of partners for obligations of the partnership depends on the type of partnership-

· General Partnership – The general partners are personally liable for the debts and obligations of the partnership, including debts incurred by their partners. Because of this broad liability, general partnerships are usually a poor choice of business entity.

· Limited Partnership – The general partners are personally liable for the debts and obligations of the partnership, but the limited partners are not.

· Limited Liability Partnership – No partners are personally liable for the debts and obligations of the partnership.

Protection of Entity Assets from Owner’s Personal Creditors

State law permits creditors of a partner to obtain a charging order against that partner’s partnership interest. A charging order, which is issued by the court, directs that distributions of income or profits that would otherwise be paid to the debtor-partner should instead be paid to the creditor.

Analysis-

Part A-

In the given case, if the partnership beween farah and david is –

A. General Partnership, then the farah and david will be personally liable for paying to the creditors. In case, david had run away, then the farah solely will be liable to creditors from his business as well as personal assets.

1. Limited Partnership – The general partners are personally liable for the debts and obligations of the partnership, but the limited partners are not.

C. Limited Liability Partnership- creditors can only recover there dues up to the extent of business assets of partnership firm of Farah and David.

Part B-

Partnership – advantages and disadvantages

Consider a partnership if the number of people involved is small (up to about 20) and limited liability is not necessary.

Advantages of a partnership include that:

• two heads (or more) are better than one
• your business is easy to establish and start-up costs are low
• more capital is available for the business
• you’ll have greater borrowing capacity
• high-calibre employees can be made partners
• there is opportunity for income splitting, an advantage of particular importance due to resultant tax savings
• partners’ business affairs are private
• there is limited external regulation
• it’s easy to change your legal structure later if circumstances change.

Disadvantages of a partnership include that:

• the liability of the partners for the debts of the business is unlimited in case of General partnership.
• each partner is ‘jointly and severally’ liable for the partnership’s debts; that is, each partner is liable for their share of the partnership debts as well as being liable for all the debts
• there is a risk of disagreements and friction among partners and management
• each partner is an agent of the partnership and is liable for actions by other partners
• if partners join or leave, you will probably have to value all the partnership assets and this can be costly.

Opinion-

In my personal opinion, it is good to have a partnership firm keeping in mind the advantages of it and our business requirements. There are risks involved in every business but that does not mean we will not do the business. We only have to take the preventive measures for tackling it and we should follow proper compliance as defined by government for forming and running a partnership business.