The Effect of Disability of a Partner of Partnership
When one partner becomes disabled, the other partner must carry the entire business burden. Also, the contribution to the profit of the disabled partner to the partnership no longer exist causing many problems to the partnership, such as:
1. Partnership will have to continue to provide income for the disabled partner from its revenues.
2. Surviving partner will usually require an increased income for the added responsibilities as result of more works.
3. Some customers may believe that the partnership will be hard-pressed to survive without the business knowledge and leadership of the disabled partner causing them to look for another supplier of products and services formerly purchased from this partnership.
4. When a partner is disabled, there will be less revenue to pay interest to the bank and other financial commitments.
If the business continues to be successful, they may decide to continue to provide remuneration to the disabled partner until they are able to return to work. Of course, in this situation, the healthy partner must take into consideration
1. The disability may be a prolong for a period of time
2. What will happen if death occurs.
3. Sometime,the partnership business may not be able to wait for the return of the disabled person.
There are some solutions:
1. Lost contribution of disable partner will be picked up by other partners.
2. Hire a replacement.
3. Lost contribution are piked up by other employees.
4. Withdraw money from sinking fund that has been set aside for such purposes.
All of these solutions demand increased cash needs before or after the disability and they can cause a major disruption to the business.
In fact, the disability income obtained from disability insurance is the cheapest way to provide the best solution, because it provides cash that makes it easier for the partnership to
1. continue to pay income to the disabled partner.
2. allows for replacement of the disabled partner, if necessary.
3. helps guarantee that operating expenses will be met.
4. creates confidence both inside and outside the firm. |
