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05 June 2009
Big Partnerships Can Work
One of the leading scholars of unincorporated entities like limited liability companies explains how the partnership model can work for large enterprises historically governed as corporations. His basic argument is that giving management an co-owner style compensation package and a duty to distribute excess cash makes up for weak limited partner governance rights. He notes that the need of partners to pay taxes on undistributed profits keeps the duty to distribute excess funds alive, while the double taxation of distributed earnings in corporations (favored by managers when the system was established in the 1930s) encourages retention of earnings which enhance management power at the expense of shareholders.
They don't seem to address what I consider to be the big down-side of partnerships -- the complicating entanglement between the partnership's tax returns and the individuals' tax returns.
ReplyDeleteIt's not just the mechanics -- presumably for a large partnership the partnership can afford to pay for tax accountants for each of its parners (for example). But consider if the partnership requests an extension to file its taxes -- this forces a delay upon each of the partners as well.
The corporate structure is more arms length between the business and the owners.