Business owners are often well-versed when it comes to partnerships advantages and disadvantages.
In business terms, a partnership occurs when two or more individuals decide to start a business venture together. This usually happens when both parties have a common business idea and have established mutual trust.
In many cases, forming a partnership may seem like a better alternative to kick-starting your own small business that might have a low turnover. Not to mention, it also helps distribute responsibilities. To help you develop a better understanding, we’ve developed this guide about partnerships’ advantages and disadvantages.
Types of Partnerships
Before we dive into the details, it’s crucial that you learn about the main types of partnerships:
This form of partnership includes general partners, who are responsible for the liabilities of the business. In other words, if one general partner is sued, the others will also be held liable. This is probably why a general partnership is considered least favorable for business owners.
This kind of partnerships includes both limited and general partners. A limited partner is someone who doesn’t have to partake in day to day management activities. Because of this, their liability is limited.
It’s fairly popular for limited partners to merely function as investors and not closely deal with business.
Limited Liability Partnerships
In this type of partnership, all partners possess limited liability. A limited liability partnership offers some characteristics of a corporation. For instance, all partners have limited liability for incompetence, errors, negligence or any kind of malpractice that may be committed by employees or partners.
However, all partners involved in such acts will still be personally liable.
Partnerships Advantages and Disadvantages
Coming back to the main highlight of our discussion, here are a few partnerships advantages and disadvantages:
Advantages of Partnership
Here are some of the major advantages of partnership:
A partnership offers increased flexibility and is generally easier to run and manage. It follows laws, rules, and regulations that are easier and more flexible in nature. As long all partners agree, there aren’t many complexities associated with management.
This is perhaps the most notable advantage of a partnership. Given the nature of the business, partners must pool in the startup capital. In other words, the more partners there are, the greater the capital. This obviously leads to more potential profit which is then shared equally among the individuals.
Partners can come together to share responsibilities. This allows both parties to utilize their skills to their best abilities. In most cases, partners divide tasks based on their strengths. So for instance, if one partner is good with numbers, the other might take care of sales.
Partnership offers increased support as one can always reach out to the other if needed. This especially aids decision making and ensures maximum resources are utilized.
Disadvantages of Partnership
On the flipside, one cannot ignore the disadvantages of a partnership. Some important points you ought to keep in mind include:
This is possibly the most obvious disadvantage of a partnership. This typically happens when both partners don’t have a sound understanding and have different thoughts on how the business should be run.
If partners are not careful, this can lead to awful disagreements and disputes that can damage the company. To avoid such misunderstandings, it is advised that partners draft a deed of partnership or set up an agreement. This’ll help dissolve any problems that might be caused because of a disagreement.
In case of an ordinary partnership, partners will be subjected to unlimited liability. This can result in a string of liabilities and expose the business to a number of financial risks. Because of this, the idea of opting for a partnership might not seem feasible for some people.
However, this problem can easily be countered by opting for a limited liability partnership. It is thus advised that business owners take the time to weigh out the advantages and disadvantages of each partnership model before making a move.
Another main disadvantage of a partnership may be taxation. When entering a partnership, partners are required to pay a tax similar to that of sole traders.
However, running a limited company would help solve most of these problems in the long run. It’s best you read up on the taxation laws in your country to make a more informed decision.
Disputes in profit sharing
Problems may arise if both partners aren’t putting in a fair share of effort in running the company. Especially since all parties will share the same amount of profit.
A partnership differs from a corporation in many ways. Can you think of any more partnerships advantages and disadvantages? Tell us about it in the comment’s section below.