The Partnership Business Entity - Essay Example

The Partnership Business Entity Businesses are commercial enterprises that offer products to people for consumption. Different businesses provide different goods and services depending on the kinds of customer tastes and preferences in their markets of choice. A business entity is a business unit that is said to legally exist on its own. In this regard a business entity is defined in legal terms as a physical person with the abilities to sue and be sued in a court of law. People develop and run different businesses either as individuals or as groups where they pull together their resources establish different kinds of partnerships. Partnerships are businesses that are started and run by two or more people (Wasserman 1-2), but the number does not exceed twenty. The partners may run the business themselves or employ professionals to run the business on their behalf. When this happens, the employees do not become owners of the company but rather, they remain as employees. To safeguard against the rights of partners, partnerships are founded upon solid legal provisions which govern capital contributions, business management including day to day operations and sharing of losses and proceeds from the business. People who want to come together and establish a partnership have to sit and agree and then draft a partnership deed; which is the legal document required before registration of the business entity. The deed has to capture the agreements and viewpoints of all the members forming the business entity. This is shown by signatures of partners on the document before presenting it for registration. The case of Aric and his friends can best be handled by operating a partnership form of business entity. There are good reasons why a partnership form of business best suits them. First is the fact that these four friends seem to know each other well and can therefore work together. Partnership form of business entities are best operated by mutual trust besides legal provisions Partners who agree to make a partnership are supposed to have full knowledge of each other. This knowledge is in terms of skills and special competencies, talents and networking potentials. A combination of these and other factors makes partners work together complementing each other until they are able to achieve their goals. Aric does not have much knowledge about marketing, production and financing of a good idea that he has cultivated since childhood. His college roommates are experts in different fields, Aric therefore finds it wise to approach them and share his idea which they agree to pull their financial and non financial resources in order to make it work. This is a clear outline of how a partnership business emanates. Business partnerships involve puling of resources for establishment of a business that is able to gain substantive market share and serve customers satisfactorily. It may happen that someone develops an idea that can generate into a unique business opportunity whose products attract a large client base within a short time. If the proprietor does not have enough capital, it is likely that he may suffer from inability to meet customers’ needs. In the case of Aric, his capital to start the business does not seem enough to make products and sustain the market in the long run. However, his friends have pledged to commit financially and welcome other shareholders in order to have the necessary financial muscle to start and run the business. Similarly this makes the second best reason upon which partnerships exist. What these partners are lacking is the legal framework upon which they can establish the business that they have agreed to finance and run. Before establishing a partnership it is important for business partners to understand important issues regarding partnership forms of business entities. Making a partnership agreement can be done orally or through a legal framework. As a matter of fact, partnership businesses are the only business entities which can be established by oral agreements. In this kind of agreement, members sit down and deliberate upon the business which they want to operate. Although this approach looks easy and cost effective it is the most dangerous and expensive in the long run. This is because, it often leads to disputes and constant disagreements since the members do not know about the rights and responsibilities in the business. When disputes arise, the partners spent a long time solving it and to the worst extent, it sometimes leads to dissolution or disintegration of the once lucrative business opportunity. To avoid all this unnecessary inconveniences, it is important for partners to make a well written operative document that defines the partner’s rights and responsibilities in the business. Preparation of an operative document is done with the assistance of an attorney or any expert in business law. This approach is quite cheap and is the legally accepted process. The costs incurred are determined by the complexity of the business, partnership arrangement preference and the experience that the particular attorney has (Spadaccini 1). The following is an outline of the main provisions in a simple operative document that Aric and his friends can use to establish their partnership business entity. The document outlines the main issues governing different aspects of their interaction in terms of articles. The document shows legal partners in the business by their names and signatures on the first page of the document. This part has to have the names of all parties forming the partnership, the effective date of commencement as well as the dates which the partners joined the partnership in case all of them did not join the partnership at the same time. The operative document has the first part having the introduction. Here, the partners define key terminologies that describe important aspects of their business and union. These terminologies should be within the context of the partnership because as stated earlier partnership agreements are not standard for all kinds of business organizations. This part may also feature the gender of the partners. The most important item in this section is the state statues which govern the partnership and the form of business engaged in. It should be understood that partnerships are made to operate in line with the legal framework that is laid down by the state and therefore it should be clearly stated. Provisions under which the partnership is to operate appear in the second article. It shows the time under which the partnership is in full operation. In case of a temporary partnership, this part indicates the date by which the business will be dissolved. It also provides instances where the partnership may be forced to dissolve in case disagreements and other factors may force its dissolution before the intended time. The name of the business is indicated in this section under an agreement that no partner shall be eligible to conduct any similar or related business activities under that name except for the partnership alone. The location of the business as well as procedures for recruitment of new partners is indicated here. The third article or clause defines the financial aspects of the partners. It shows the total of capital payment for each partner. For this section the following provisions apply; that the capital amount in the partnership belongs to the members according to their ratio of contribution. Similarly, any capital needed in future may be contributed by any partner without any set maximum for such contribution. In this case, the capital contributed shall be treated in the same way the original capital was treated. Usually interest is earned by members according to the capital that they have in the business. This section outlines the determination of profits and losses and the manner in which they are treated. In case of borrowing from the business, the section provides the mechanisms to be followed. It explains that creation and maintenance of financial statements is the mandate of the accounts department of the partnership and any member has the right to inspect and make recommendations. The fifth article in the operative document highlights the management plan of the partnership. In overall, all final authority and control of the partnership is a duty of the duly recognized and registered partners. The power to make major decisions about management of the partnership must be agreed by the partners in a meeting or by mere consent of partners’ through their signatures. In case the partners may not be physically present in the daily management of the business, the section gives provision for delegation of authority to other persons agreed by the partners. Any decisions or agreements made by that party becomes binding and remains valid until an agreement to rescind the decision is reached by all the partners. This provision also outlines the period which will be the fiscal year of the business. Unless stated otherwise, this period always remains as stated and agreed by all the partners. All the necessary banking arrangements are clearly stipulated in this section. The partners agree unanimously on the banks that will provide them with necessary banking services such that all payments and deposits concerning the business shall be made in the business bank account and no other account which is not agreed by members. Cheques, drafts and other payment instruments may be done by any member of the partnership. The necessary records are preserved in a principal place as agreed by the partners where they can freely access them for inspection or other functions. With regard to partnership assets, this section stipulates that all properties of the partnership to be registered under the name of the business according to the ratio of each partners capital account. Matters regarding dissolution and its determination process are explained in article five. For resolution, the provision allows for the agreed period of time when the final goal of the partnership has been achieved or any time when the partners agree unanimously to do so. In case the partnership is dissolved, proper accounting of the business shall be done including the profit accounts of the particular patterns up to the time of dissolution. Any kinds of properties under the custody of the partners are liquidated and the resulting proceeds given to the partners according to the ratio of their overall contribution during the life of the business. If any partner may wish to transfer or sell his shares, he may do so only according to the decision and agreement of other partners, in case he goes ahead to do so without due regard of the laid down procedure, the other partners have a right to restrain him according to the provisions in this section or the laid down statues of the state. The last article in the partnership entails general guidelines about general management the partnership. For instance, any notices, consents and requests required in the course of management has to be done in writing and in due time to give room enough room for consultations. This section also highlights the specific provisions in the state law which governs partnership businesses. It should be understood that partnership agreements vary in the complexity of issues that they provide. What determines the size or articles to constitute the partnership agreement is the size of the business. Simple business partnerships like the one for Aric and friends may require simple agreements like the one outlined in this paper. This kind of partnership is easy to manage because it’s small, but as it expands then more legal issues have to be incorporated so that the business stays long. Works cited Spadaccini Michael. “Partnership 101.” 2005. Web. 7 March 2014. < http://www.entrepreneur.com/article/77980> Wasserman Elizabeth. “How to Structure a Partnership”. 2010. Web. 7 March 2014. < http://www.inc.com/guides/structuring-partnerships.html> Read More