An Analysis of the Formation and Behavior of Partnerships

The partnership form of business has become increasingly popular in the United States and may account for a significant portion of new business formation in the future. In spite of the growth of partnerships, there has been little formal analysis of their formation or behavior. In this article, we consider the possibility that the level of partnership formation is inefficient and find conditions under which tax-subsidy schemes yield welfare-improving changes in the level of partnership formation. We also determine the effects of income taxation on partnership activity. Finally we examine the impact of government expenditure programs on partnership behavior. We find that some of these programs, for example those that are ostensibly designed to foster new business, may actually inhibit partnership formation and increase the likelihood of partnership failure.