This is a true story related by David Allen, Director of the John F. Baugh Center for Entrepreneurship at Baylor University. The names have been changed to hide the identities of the individuals involved. 

One morning years ago, while working in the office of my outdoor advertising company, I received a telephone call from an old high school acquaintance. He had started a humidor shop in partnership with his older brother, the older brother supplying the finances and the younger managing the shared venture. Gary asked me to call on him to discuss billboard advertising in order to make the local market aware of the new enterprise. After I explained the benefits of outdoor advertising to achieve his goals, Gary contracted with my company to display a number of small billboards throughout the market. 

After designing the posters, ordering the printing work, and scheduling the specific locations which would best reach Gary's target market, the materials arrived and were posted on the agreed upon date. About mid- morning on the posting date, the older brother, Jerry, called me and mentioned that he had seen some of the posters on billboards in the area. He wanted to know what was going on, because he had no idea that the displays had been ordered. I explained what had taken place and that Gary had contracted for the advertising space. Jerry expressed his displeasure over the telephone, in no uncertain terms, so I asked him if he was dissatisfied with the design or the locations that had been assigned. He said that he actually was quite pleased with the showing, but he was simply upset with his brother for contracting for it without consulting with him first or even informing him as to what he had done. Jerry was, after all, the partner who had to pay the bills. 

This incident has stayed in my memory over the years as a caution against starting a business using the partnership as the legal form of organization. Jerry understood that while he had not agreed to the transaction and, indeed, did not even know what his brother had done, he was nonetheless liable for paying the entire bill, because his partner had signed on behalf of the business. Over the years, I have seen too many partnerships destroyed because the partners failed to understand this crucial feature of general partnerships. Partnerships can work, but only when there is a strong partnership agreement in place to specify the precise duties and responsibilities of each partner within the firm. In addition, the partners need to be in complete agreement on the goals and direction of the partnership and the methods that will be employed to achieve them; otherwise, the venture can go off the rails in very short order. 

The good news of the incident that I just related is that the advertising did its job; the business found its footing quickly and was making profits in a very short time. Jerry was pleased with the outcome, but he had a long talk with Gary regarding the need for the two of them to confer before signing any contracts. Going a step further, they found a local attorney who understood the potential pitfalls of partnerships and worked out a partnership agreement that defined the roles and responsibilities of the two partners. The business thrived for several years until it eventually was sold to a third party. 

While this particular story had a happy ending, too many good businesses falter and, in time, fail because partners are completely unaware of the joint and several liability aspect of their chosen form of organization. 

Question 1 What are the advantages and disadvantages of running a business as a partnership? 

Question 2 What other legal forms of organization could have been used for this business? Which form would you recommend? Why?

Answer rating: 100% (QA)

1 Advantages of Running a Business as a Partnership 1 Ease of Formation Partnerships are relatively easy to form with fewer formalities and legal requ... View the full answer