Advantages and Disadvantages of Partnerships - Case Study Example

Business law Name Course Lecturer Date Advantages and disadvantages of partnerships In a bid to pursue profits in business, an entrepreneur is faced with the question of the form of business organization appropriate for the business idea and other situational factors. These factors may include ease and cost of creation and management, owners’ liabilities, business capital requirements, as well as tax considerations (Miller & Jentz, 2010). There are essentially three types of business forms: sole proprietorships, partnerships and limited liability companies or corporations. These are the traditional and most common forms of business organization for a majority of entrepreneurs. However, is imperative that an entrepreneur makes a choice of either alternatives with regard to the advantages and disadvantages relative to the aforementioned situational factors. As such, it is advisable to select the most cost effective and profitable form. For Susan, selection of a partnership form has both advantages and disadvantages. Business law literature defines a partnership as an express or implied agreement between two or more individual to carry out a business for a profit (Miller & Jentz 2010; Pride, et al. 2012). Essentially, the partners are co-owners of the business entity with joint control over its running and sharing profits and liabilities. They stand a chance to benefit from many advantages related to it, as compared with other forms of business organizations. Firstly, partnerships are characterised by ease of formation and start-up. There are fewer legal requirements than limited companies. Essentially, the legal requirements are limited to business name registration with the registrar as well as the acquiring necessary. In addition, the partners may have to develop a partnership agreement as the legal document by which the partnership is formed and managed. The legal agreement is optional, but it is imperative for the partners to have one so that the partnership is legally binding and controlled. Similar to its formation, dissociation of the business is easy and less costly than in limited liability companies. Entrepreneurs are often challenged by lack of various types of capital in the business formation. For Sophia, a partnership has more available capital than sole businesses since the partners can pool together their resources. This additional funding as well as partners’ unlimited liability is an advantage of better credit rating so that creditors will be more willing (Pride, et al. 2012). Partnerships offer partners an opportunity to equally share all benefits and profits. All partners are equal shareholders into the business unless the partnership agreement stipulates otherwise. With regard to this, partnerships do not pay taxes or file annual tax returns since they are not legal entities of their own. As such, the partners may file returns of the profit shares as individual tax returns. In addition, there is more relative freedom from government control except for necessary licenses, permits and regulations than in corporationsc (Gitman & McDaniel, 2009). With regard to the management and decision making, partnerships have faster decision-making processes that equally involve all partners unless otherwise stated in the agreement. It is faster than in limited liability where shareholders have to vote in annual or special general meetings. In addition, the partners have more personal touch and interest into the business and are more likely to make more effective decisions than in limited companies involving directors and shareholders. Further, the decisions and management are better than in sole businesses owing to synergistic value of combined knowledge and skills from the partners Essentially, the prominent disadvantage in partnerships is that the business is not recognized as a legal entity able to sue and to be sued. As such, each general partner is personally liable for the obligations of the business beyond the share capital. This may lead to litigations that touch personal property regardless of who caused the liabilities. However, Sophia and Jackson may eliminate this by forming a limited liability partnership in which each has protection from the responsibility of the others’ acts. Secondly, partnerships face the risk of discontinuity in case any of the partners decide to leave the partnership. However, the other partners may save the business by buying the leaving partners’ shares. As a human factor in interaction, partnerships also face the risk of management disagreements owing to conflicting alternatives (Gitman & McDaniel 2009). In view of a need to dissolve or exit a partnership, Gitman & McDaniel (2009) indicate that there are difficulties. The thumb rule is that there is more ease in formation than in dissolution. This is mostly due to lack of standing and binding agreement or regulations thereof. In addition, they often lack stipulated decision making processes such as voting procedures that are found in limited companies. The implied equal voting rights or voting according to the share capital are subject to abuse if there is no binding agreement. Law of tort and negligence The laws of tort and negligence are essentially entrenched in the common law with reference to establishing reasonable and acceptable standards of care between entities. According to Harpwood 2000, the tort of negligence is difficult to define in simple terms. Citing Lord Roskill in Caparo Industries v Dickman [1990], there is no simple approach in defining tort law or provide a ready answer in each case due the discretion of the law in imposing liability of negligence or even determining the extent of the liability. In a nutshell, negligence refers to a tort in which duty of care falls below reasonable standards resulting in damage caused to an entity to which duty of care is owed (Rush & Ottley 2006). Essentially, a civil action in a court of law over a negligence is valid to the extent that it meets a threshold of several combined aspects. Negligence tort comprises of four aspects: duty, breach, causation and damage. Firstly, a claimant must prove that the defendant owed him or her duty of care. Duty of care refers to a standard of care similar to that of a reasonable and prudence party acting with ordinary skill and care. It is referred to as the ‘reasonable person’ standard (Emerson 2009) and is applied by tort law to dertemine whether there was breaching. Unless the plaintiff proves that the defendant had owed him duty of care in the circumstances of the case, the defendant was not negligent. Duty of care exists within a relationship in which one party can reasonably foresee that any ommission or commission may lead to damage upon the other party. However, it vital to ascertain the issue of proximity between the plaintiff and the defendant. Proximity to how the defendant and the plaintiff relate. Secondly, the plaintiff must prove that the defendant breached duty of care. By this the court must verify that the defendant’s actions of omission or commission fell below the accepted standards of a reasonable person in a similar situation. It refers to the failure to comply with acceptable and reasonable standards of care. This principle of negligence involves having the plaintiff proof of legal fault on the defendant’s part. Breaching of duty is proven if the risk of harm is more than the cost of precautionary measures and involves the foreseeability aspect. Due to lack of a common standard by which to attest to reasonableness, legal practice is emphatic on factual presentation. Thirdly, it is imperative that the plaintiff proves the principle of causation (Harpwood 2000). This is the gist of negligence tort since a direct relationship between the damage and injury and the act of negligence must be proven. The said injury sustained and for which compensation is sought must be directly caused by the defendant’s omission or commission and not any other. The occurrence of damage does not directly establish for negligence. Finally, the court must ascertain that the defendant’s actions actually resulted in legally recognizable damage or injury (Miller & Jentz 2010). A defendant may have been negligent but still not cause or result in liability on the part of the plaintiff. Conclusively, the court must ascertain that the council owed Josephine duty of care and that the duty of care was breached directly leading to a liability on the part of Josephine. In view of a case against the local council, Josephine may prove to the court that defendant owed her duty of care. By the virtue of the fact that she was on the bridge within the jurisdiction of the council, the council should have provided reasonable care. By reasonable care standards, the council should install fencing on the bridge and use of signs to avoid risk of injury. However, she may not be successful in proving the aspect of breaching since there was a fence and signage indicating prohibition of diving at the bridge. By simply putting these two, the council had worked to reduce the risk of harm. As such, the council may put up several defences within the tort law against Josephine’s accusations. Firstly, the council may prove that the plaintiff assumed risk. Assumption of risk defence proves that the plaintiff had prior knowledge of the risks involved and that he or she voluntarily assumed them by engaging into the activity. From factual elements, Josephine assumed the risks of injury having had seen the signage restricting diving. In addition, there was a fence to prevent people from jumping over the bridge. Secondly, the council may apply defence on comparative and contributory negligence. The latter is a law doctrine requiring all persons to exercise reasonable care for themselves (Boom & Magnus 2003). The plaintiff is expected to bear the liability of injury together with the defendant since the former contributed to the injury. This has come to be known as comparative negligence by which both parties’ negligence and damage are computed and then accordingly distributed (Miller & Jentz 2010). References Boom, W. & Magnus, U. M.-C. M., 2003. Unification of tort law : contributory negligence. Hague: Kluwer International. Emerson, R. W., 2009. Business law. 5th ed. Hauppauge: Barron's. Gitman, L. & McDaniel, C. D., 2009. The future of business : the essentials. 4th ed. Mason: South-Western Cengage Learning. Harpwood, V., 2000. Principles of Tort law. 4th ed. London: Cavendish Publishing. Miller, R. L. & Jentz, G. A., 2010. Fundamentals of business law : excerpted cases. 2nd ed. Mason: South-Western Cengage learning. Pride, W. M., Hughes, R. J. & Kapoor, J. R., 2012. Business. 11th ed. Mason: South-Western Cengage. Rush, J. & Ottley, M., 2006. Business law. London: Thompson. Caparo Industries v Dickman [1990] Read More