ECONOMICS TOPIC 5 LESSON 2

ECONOMICS TOPIC 5 LESSON 2

Partnerships and Franchises

ESSENTIAL QUESTION

How can businesses and labor best achieve their goals?

The Characteristics of Partnerships

partnership 

A partnership is a business organization owned by two or more persons who agree on a specific division of responsibilities and profits. In the United States, partnerships account for nearly 10 percent of all businesses. They generate almost 15 percent of all receipts and just over a quarter of all the income earned by all businesses.

General Partnership

The most common type of partnership is the general partnership. In this type, all partners share equally in both responsibility and liability. Partners share some of the economic responsibility of the business based on how much they contribute to launching the partnership. Similarly, they share proportionately in the rewards from the business.

Limited Partnership

In a limited partnership, only one partner is required to be a general partner. That is, only one partner has unlimited personal liability for the firm’s actions. The remaining partner or partners contribute only money. If the business fails, they can lose only the amount of their initial investment. If the business succeeds, though, limited partners share in the profits.

Limited Liability Partnerships

The limited liability partnership (LLP) is a newer type of partnership recognized by many states. In this type of partnership, all partners are limited partners. An LLP functions like a general partnership, except that all partners have limited personal liability in certain situations, such as another partner’s mistakes.

Open Ended

The table shows how the same business loss might be shared by partners in three different partnerships. Synthesize Why does the personal liability of the partners differ in these scenarios?

Fill in the Blanks

Compare and Contrast How do limited liability partnerships differ from the other two types of partnerships?

Limited liability partnerships have no

partners, unlike the other two types of partnerships.

Multiple Choice

Analyze Information Which of these is an advantage that general partners alone enjoy in a limited partnership?

• control of business operations

• limited liability

• share of investment

• share of profits

Advantages of Partnerships

Ease of Start-Up

Like proprietorships, partnerships are easy and inexpensive to establish. The law does not require a written partnership agreement. Most experts, however, advise partners to work with an attorney to develop articles of partnership, or a partnership agreement.

Fill in the Blanks

Make Generalizations What generalization can you make about how investment, profits, and liability are shared in general partnerships?

(General partners’ share of profits and liability is proportional to their

in the business.)

Financial Impact

A major advantage of partnerships is the ability to raise capital. In a partnership, more than one person contributes assets, or money and other valuables. As a result, these businesses can raise more capital than a sole proprietorship. 

Shared Decision Making

In a sole proprietorship, the owner has the burden of making all business decisions. In a partnership, the responsibility for the business may be shared. 

Multiple Choice

Contrast What is an advantage that the general partners who own a partnership have that the owner of a sole proprietorship may not have?

• no need to follow government regulations

• better access to capital

• ease of start-up

• no need to hire employees

Disadvantages of Partnerships

Potential for Conflict 

As in any close relationship, partnerships have the potential for conflict. If a business has more than one general partner, each one has only partial control over the firm. None of them enjoys as much freedom as sole proprietors do. 

Fill in the Blanks

Make Decisions What do the partners in this business gain by taking on a new partner? What do they give up?

They gain a greater opportunity for success compared to continuing as is. They lose a share of the profits and of control of the business, since the new

would have a right to both.

Unlimited Liability

Unless the partnership is an LLP, at least one partner has unlimited liability. As in a sole proprietorship, any general partner has full responsibility for any financial obligations the firm takes on. 

Open Ended

Analyze Graphs If the trend suggested by the graph continues, about what percentage of partnerships do you predict would survive by the end of Year 4? Explain.

Multiple Choice

Identify Central Issues Suppose a business is owned by two partners. What skill does each partner need that a sole proprietor would not necessarily need?

• decision-making ability

• management expertise

• ability to collaborate with an equal

• advertising expertise

The Franchise Alternative

What Is a Franchise?

As you learned earlier, a franchise is a contract issued by a local authority that gives a single firm the right to sell its goods within an exclusive market.

A business franchise is a semi-independent business that pays fees to a parent company. In return, the business is granted the exclusive right to sell a certain product or service in a given area. 

Fill in the Blanks

Analyze Information Which aspect of franchising might be helpful for a relatively inexperienced entrepreneur?

A relatively inexperienced entrepreneur who became a franchise owner would benefit from the

company’s training and support.

Advantages of Franchises

• Management training and support 

• Standardized quality

• National advertising programs 

• Financial assistance

• Centralized buying power 

Disadvantages of Franchises

• High franchising fees and royalties

• Strict operating standards

• Purchasing restrictions

• Limited product line

• 
  

Fill in the Blanks

The chart compares profits when the same revenue is earned by three types of businesses. Analyze Charts Why does the franchise owner have less profit than the sole proprietor?

(The franchisee has to pay a ________ fee and _________ fee, which are costs the sole proprietor does not incur.)

Multiple Choice

Analyze Information What is an advantage of being a franchisee?

• brand recognition

• control over products sold to customers

• franchising fees

• royalty payments

Multiple Choice

Analyze Information What is an advantage of being a franchisee?

• brand recognition

• control over products sold to customers

• franchising fees

• royalty payments

Open Ended

How can businesses and labor best achieve their goals?