MODUL PERKULIAHAN
Entrepreneurship
and Innovation
Management
Partnership Business and
Negotiation Dimention
Fakultas
Program Studi
Ekonomi
Magister
Management
TatapMuka
14
Kode MK
DisusunOleh
35007
Dr. M. Ali Iqbal, M.Sc
Abstract
Kompetensi
Sole Proprietorship, partnership,
corporation, limited liability company,
and limited liability partnership
Mahasiswa diharapkan dapat
memahami sole Proprietorship,
partnership, corporation, limited liability
company, and limited liability
partnership
Pembahasan
Sole Proprietorships.
A sole proprietorship is defined as a business owned by a single person who
receives all profis and assumes all risks. There are certain facts about sole proprietorships
which you should know. Owners of this form of business arc 'selfemployed"; usually the
owners are the active managers. This form of business is the oldesr form of business
organization. It is also the easiestype of business to start, operate and end. This may be the
reason why it is the most common form of organization.
Advantages.
Sole proprietorships have certain advantages. A sole proprietorship is easy and
inexpensive to set up. There are major reasons why this is so. Fint, no state charter
isneeded. Second,nolegalagreementorfeeisrequired" Ifastateorcitytcenseisrequired, it is
easy to attain. The only other legal requirement is that the activity itself must be legal.
Consider an example of a sole proprietorship simply set up. Mr. Jones rented a stand to sell
some produce. At this point, he was in business as a sole proprietor.
Another advantage of sole proprietorship is that it allows the owner much freedom.
The owner can make business decisions without consulting a partner or board of directors.
He/ she can take action on decisions promptly. The owner can also change methods of
doing business quickly.
A third advantage of ilre sole proprietorship is that it encourages the owner to do well.
All profits go to the proprielor. This motivates him/her to work hard and !o use good
judgment.
How Certain Disadvantages Affect Sole Proprietorships
Inability to raise large sums of capital. often, the sole owner is unable to raise enough
capital, hindering hiffier from starting or expanding the business, capital is the amount of
money that the proprietor has and can borrow to invest in the business. There are certain
reasons why the proprietor of a sole proprietorship has difficulty raising capital. Banks often
lend no more than the value of the proprietor's personal assets. second, aproprietor's credit
rating is usually lower than that of a large firm, so a higher interest rate on money borrowed
must be paid. Third, the proprietor cannot attract investors by sharing ownership of the
business. Finally, once in operation, profits alone are often too low to afford expansion.
Changing to some other form of business ownership may be required for expansion.
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Limited life. A sole proprietorships legally ended upon death, bankruptcy, imprisonment, or
insanity of the owner. It is often so much a one-person business that it is profitable only as
long as the owner is active. Due to its uncertain limited life, other businesses are often
unwilling to make long-term financial commitments with the owner.
Unfimited liability for debts. Unlimiled liabiliry means the creditors may take the owner's
personal possessions ifdebts are not paid by the business. If the business fails, the owner
may lose most of his/her personal savings and possession
Lack of assistance in management. The owner must often perform all functions of
management in the business. He/she may serve as general manager, sales manager,
purchasing manager, advertising manager, accountant, and personnel manager. Many
people are not qualified to fulfill all management functions, so certain areas of the business
suffer.
Operational problems. Problems in operating can hinder the progress made by a sole
proprietorship. certain operational problems do arise. First, poor location and inadequate
buildings and equipment may hinder progress. Second, the need to pay high enough wages
to attract good employees may not be met. Third, purchasing a large volume to get the best
discount may be impossible.
Sole Proprietorship
Percentage of sole proprietors, partnerships, and corporations
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Partnership.
Partnerships are fairly easy to form. People form partnerships simply by a verbal agreement,
or more formally, by written agreement. A partnership is a legal entity. A partnership can
own property (land, buildings, equipment), and can sue or be sued. A partnership also is an
accounting entity. Thus, the personal assets, liabilities, and transactions of the partners are
excluded from the accounting records of the partnership, just as they are in a proprietorship.
The net income of a partnership is not taxed as a separate entity. But, a partnership must file
an information tax return showing partnership net income and each partner's share of that
net income. Each partner's share is taxable at personal tax rates, regardless of the amount
of net income each withdraws from the business during the year.
Mutual agency
Mutual agency means that each partner acts on behalf of the partnership when engaging in
partnership business. The act of any partner is binding on all other partners. This is true
even when partners act beyond the scope of their authority, so long as the act appears to be
appropriate for the partnership. For example, a partner of a grocery store who purchases a
delivery truck creates a binding contract in the name of the partnership, even if the
partnership agreement denies this authority. On the other hand, if a partner in a law firm
purchased a snowmobile for the partnership, such an act would not be binding on the
partnership. The purchase is clearly outside the scope of partnership business.
Corporations have unlimited life. Partnerships do not. A partnership may be ended
voluntarily at any time through the acceptance of a new partner or the withdrawal of a
partner. It may be ended involuntarily by the death or incapacity of a partner. Partnership
dissolution occurs whenever a partner withdraws or a new partner is admitted. Dissolution
does not necessarily mean that the business ends. If the continuing partners agree,
operations can continue without interruption by forming a new partnership.
Each partner is personally and individually liable for all partnership liabilities. Creditors'
claims attach first to partnership assets. If these are insufficient, the claims then attach to the
personal resources of any partner, irrespective of that partner's equity in the partnership.
Because each partner is responsible for all the debts of the partnership, each partner is said
to have unlimited liability.
Partners jointly own partnership assets. If the partnership is dissolved, each partner has a
claim on total assets equal to the balance in his or her respective capital account. This claim
does not attach to specific assets that an individual partner contributed to the firm. Similarly,
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if a partner invests a building in the partnership valued at $100,000 and the building is later
sold at a gain of $20,000, the partners all share in the gain.
Partnership net income (or net loss) is also co-owned. If the partnership contract does not
specify to the contrary, all net income or net loss is shared equally by the partners. As you
will see later, though, partners may agree to unequal sharing of net income or net loss.
Organizations with Partnership Characteristics
If you are starting a business with a friend and each of you has little capital and your
business is not risky, you probably want to use a partnership. As indicated above, the
partnership is easy to establish and its cost is minimal. These types of partnerships are often
called regular partnerships. However if your business is risky—say, roof repair or providing
some type of professional service—you will want to limit your liability and not use a regular
partnership. As a result, special forms of business organizations with partnership
characteristics are now often used to provide protection from unlimited liability for people
who wish to work together in some activity.
The special partnership forms are: limited partnerships, limited liability partnerships, and
limited liability companies. These special forms use the same accounting procedures as
those described for a regular partnership. In addition, for taxation purposes, all the profits
and losses pass through these organizations (similar to the regular partnership) to the
owners, who report their share of partnership net income or losses on their personal tax
returns.
Limited Partnerships
In a limited partnership, one or more partners have unlimited liability and one or more
partners have limited liability for the debts of the firm. Those with unlimited liability are
general partners. Those with limited liability are limited partners. Limited partners are
responsible for the debts of the partnership up to the limit of their investment in the firm.
The words “Limited Partnership,” or “Ltd.,” or “LP” identify this type of organization. For the
privilege of limited liability, the limited partner usually accepts less compensation than a
general partner and exercises less influence in the affairs of the firm. If the limited partners
get involved in management, they risk their liability protection.
Limited Liability Partnership
Most states allow professionals such as lawyers, doctors, and accountants to form a limited
liability partnership or “LLP.” The LLP is designed to protect innocent partners from
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malpractice or negligence claims resulting from the acts of another partner. LLPs generally
carry large insurance policies as protection against malpractice suits. These professional
partnerships vary in size from a medical partnership of three to five doctors, to 150 to 200
partners in a large law firm, to more than 2,000 partners in an international accounting firm.
Limited Liability Companies
A hybrid form of business organization with certain features like a corporation and others like
a limited partnership is the limited liability company, or “LLC.” An LLC usually has a limited
life. The owners, called members, have limited liability like owners of a corporation. Whereas
limited partners do not actively participate in the management of a limited partnership (LP),
the members of a limited liability company (LLC) can assume an active management role.
For income tax purposes, the IRS usually classifies an LLC as a partnership.
The proprietorship form of business organization is still the most popular, followed by the
corporate form. But whenever a group of individuals wants to form a partnership, the limited
liability company is usually the popular choice. One other form of business organization is a
subchapter S corporation. A subchapter S corporation has many of the characteristics of a
partnership—especially, taxation as a partnership—but it is losing its popularity. The reason:
It involves more paperwork and expense than a limited liability company, which in most
cases offers similar advantages.
Advantages and Disadvantages of Partnerships
Advantages of Partnerships
• Partnerships are relatively easy to establish.
• With more than one owner, the ability to raise funds may be increased, both because two
or more partners may be able to contribute more funds and because their borrowing capacity
may be greater.
• Prospective employees may be attracted to the business if given the incentive to become a
partner.
• A partnership may benefit from the combination of complimentary skills of two or more
people. There is a wider pool of knowledge, skills and contacts.
• Partnerships can be cost-effective as each partner specializes in certain aspects of their
business.
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• Partnerships provide moral support and will allow for more creative brainstorming.
Disadvantages of Partnerships
• Business partners are jointly and individually liable for the actions of the other partners.
• Profits must be shared with others. You have to decide on how you value each other’s time
and skills. What happens if one partner can put in less time due to personal circumstances?
• Since decisions are shared, disagreements can occur. A partnership is for the long term,
and expectations and situations can change, which can lead to dramatic and traumatic split
ups.
• The partnership may have a limited life; it may end upon the withdrawal or death of a
partner.
• A partnership usually has limitations that keep it from becoming a large business.
• You have to consult your partner and negotiate more as you cannot make decisions by
yourself. You therefore need to be more flexible.
• A major disadvantage of a partnership is unlimited liability. General partners are liable
without limit for all debts contracted and errors made by the partnership. For example, if you
own only 1 percent of the partnership and the business fails, you will be called upon to pay 1
percent of the bills and the other partners will be assessed their 99 percent. However, if your
partners cannot pay, you may be called upon to pay all the debts even if you must sell off all
your possessions to do so. This makes partnerships too risky for most situations. The
answer would be a different business
Why do people choose partnerships? One major advantage of a partnership is to combine
the skills and resources of two or more individuals. In addition, partnerships are easily
formed and are relatively free from government regulations and restrictions. A partnership
does not have to contend with the “red tape” that a corporation must face. Also, partners
generally can make decisions quickly on substantive business matters without having to
consult a board of directors. On the other hand, partnerships also have some major
disadvantages. Unlimited liability is particularly troublesome. Many individuals fear they may
lose not only their initial investment but also their personal assets, if those assets are
needed to pay partnership creditors. Illustration 12-2 summarizes the advantages and
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disadvantages of the regular partnership form of business organization. As indicated in the
previous section, different types of partnership forms have evolved to reduce some of the
disadvantages.
The Partnership Agreement
A well-developed partnership agreement reduces ethical conflict among partners. It specifies
in clear and concise language the process by which the partners will resolve ethical and
legal problems. This issue is especially significant when the partnership experiences
financial distress.
Ideally, the agreement of two or more individuals to form a partnership should be expressed
in a written contract, called the partnership agreement or articles of co-partnership. The
partnership agreement contains such basic information as the name and principal location of
the firm, the purpose of the business, and date of inception. In addition, it should specify
relationships among the partners, such as: 1. Names and capital contributions of partners. 2.
Rights and duties of partners. 3. Basis for sharing net income or net loss. 4. Provision for
withdrawals of assets. 5. Procedures for submitting disputes to arbitration. 6. Procedures for
the withdrawal or addition of a partner. 7. Rights and duties of surviving partners in the event
of a partner's death. We cannot overemphasize the importance of a written contract. The
agreement should attempt to anticipate all possible situations, contingencies, and
disagreements. The help of a lawyer is highly desirable in preparing the agreement.
Corporation is a type of business which is formally registered as a public owned company it
is recognized as a separate entity from its owners.
The three main disadvantages of sole proprietorships and partnerships are:
Advantage
The popularity of corporations is due to following advantages:
1.
The liability of the owners towards the creditors is limited to their investment in the
company. This means that in case of liquidation of the company, if the company's assets
are insufficient to meet the liability, nothing is required to be contributed by the owners.
Only the owners' contribution is at stake rather than their personal assets.
2.
The corporation is considered a legal person with perpetual existence. It exists until it
is liquidated and death or change in ownership has no effect on the corporation.
3.
Additional capital can be raised easily through stock markets, etc.
4.
The ownership is represented by the number of share certificates held by a person,
and this makes the transfer of ownership very easy.
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Disadvantages
Following are the disadvantages of a coporation:
1.
Establishing a corporation is a complex process and requires registration with the
central regulatory authority and listing on a stock exchange which required fulfillment of
certain requirements related to the amount of capital, number of directors, etc.
2.
Normally the corporations have a large number of shareholders; they delegate the
governance function to a body of persons called board of directors. The board of
directors hires management to look after the day to day affairs of the corporation. The
management is an agent and the owners are principal. It is quite possible that the
management may act to further their own interests rather than the interest of the owners
of the corporation. When this happens it is called an agency problem.
3.
In case of corporations there is double taxation. First of all the corporate income is
taxed at a flat rate and then the dividends paid to the shareholders is taxed.
1. Close Corporation
The close corporation is a statutory creature and is one of the variations of a general
corporate structure in which the shareholders, directors and officers are usually the same
individuals and the formality of a board of directors is not required. The shareholders typically
manage a Close Corporation and the number of shareholders is limited to thirty. A limitation
in using this structure is that transfers of stock are generally more restricted and this is not
the form of entity in which the founders will raise equity. Most jurisdictions require that
shareholders in a Close Corporation must offer their stock to the other shareholders before
transferring it to a third party. Close Corporations are much less formal than those forms of
entities in which a board of directors is elected by the shareholders. The Close Corporation
resembles a partnership as it relates to governance matters. Advantages: 1. Limited Liability
2. Less formality 3. Distinct Legal Entity 4. Perpetual Existence Disadvantages: 1. Number of
shareholders limited 2. Restrictions on raising capital 3. Restrictions on transfer and sale
2. S Corporation A Subchapter S Corporation is a corporate form of business in which a
special tax status has been elected under the Internal Revenue Code. Unlike a C
Corporation, the S Corporation has pass through tax treatment and is therefore not subject
to double taxation. All other corporate attributes of an S Corporation exist, including limited
liability for its shareholders. The IRS does not tax the corporate profits of an S Corporation in
that the income of the corporation is taxed directly to the shareholders in accordance with
their pro rata interest in the outstanding capital shares of the corporation. The S Corporation
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is subject to additional limitations that do not apply to a C Corporation. For example, an S
Corporation is limited to one hundred (100) shareholders and may only issue one class of
stock.
Advantages: 1. Single taxation 2. Limited Liability 3. Distinct Legal Entity 4. Perpetual
Existence Disadvantages: 1. Limited to 100 shareholders 2. One class of stock 3. More
difficult to create.
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DaftarPustaka
Hisrich, Robert D dan Michael P Peters (2002),’Enterpreneurship’, Mc Graw Hill, New York
Lambing (2000), ’Enterpreneurship’, Mc Graw Hill, New York
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Entrepreneurship and Innovation Management
Dr. M. Ali Iqbal, M.Sc
PusatBahan Ajar dan eLearning
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