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Top 10 Advantages And Disadvantages Of A Business Partnership
There are several hundred partnerships in the USA, which make up one of the most common business forms. There are two main types of business entities: sole proprietorships and limited companies.
The business partnership has both advantages and disadvantages. As seen from a positive perspective, business partnerships allow you to enter into a partnership without feeling tethered to the formalities of a limited company. A partnership business is less positive in that you lose control over your business’s direction if adequate protection isn’t provided.
Taking a look at a business partnership from both sides, here are the advantages:
Advantages and Disadvantages of a business partnership
When used correctly, business partnerships can be very beneficial.
1. Less formal with fewer legal obligations
Partnerships tend to be less formal than limited companies, which has several advantages.
Limited companies have a more complex accounting process than partnerships. Keeping records of income and expenses is still required in the partnership business, even though it does not require a Corporation Tax Return. HMRC requires partners to file partnership tax returns and each partner should complete his or her own self-assessment tax return, including details of any profits the partnership generates.
In contrast to a limited company, you won’t need to submit a confirmation statement and the multitude of other forms that may be required by Companies House will never apply to sewer records to maintain: in particular, a business partnership does not need to maintain a set of statutory books like a limited company has to.
It is easy to dissolve a partnership business at any time without the need for a formal partnership agreement: this allows each partner to decide for or against keeping the business.
2. Easy to get started
A partnership can be formed orally or in writing between the partners. Business partnerships do not need to be registered with Companies House for tax purposes and can be tax-registered with HMRC quite easily. Partner registrations for self-assessment can also be completed online, but you must register individually.
It’s usually a good idea to put in place a partnership agreement, even though it will take more time and cost more to do so. Partners’ rights and responsibilities are outlined in this document, along with what would happen in a variety of scenarios such as if the partners fundamentally disagree or someone wishes to leave.
3. Sharing the burden for the advantage of a business partnership
A business partnership offers companionship and mutual support while operating on your own as a sole proprietor would not. It can be daunting and stressful to start and manage a business alone, especially if you’ve never done it before. It’s a team effort when you form a partnership.
4. Access to knowledge, skills, experience, and contacts
It is likely that the company will be more successful as a result of the knowledge, skills, experience, and contacts brought to it by each of its partners than would be possible if they were trading individually.
Each partner can specialize in something he or she enjoys most, and share out tasks. The company’s books could be maintained by one partner with a financial background, while the sales department might be handled by another who has extensive sales experience. By contrast, a sole proprietor would be responsible for doing all of these things himself (or managing someone he employs to help).
5. Better decision-making to get the advantages of a business partnership
Partnerships offer the business a unique perspective that would otherwise be unavailable if you were operating alone. The combined conclusions of two heads are generally better than what one could achieve individually in business, where a situation is debated more effectively by two rather than one person.
Partnership business has the advantage of keeping its affairs private as compared with a limited company. Limited companies, on the other hand, are required to maintain certain records and can make these available to the public at Companies House.
7. Ownership and control are combined
Shareholders and directors (although they’re often the same person) share ownership and day-to-day duties of a limited company. In other words, shareholders’ preferences can limit directors’ ability to pursue what they consider to be the best interests of their companies.
Partnerships, on the other hand, are owned and controlled by both partners. Unless any shareholders interfere, the partners can proceed with their partnership as long as they can agree on how it will be run and driven forward. The flexibility of partnerships can allow them to adapt to changing circumstances more quickly than limited companies, thereby providing them with a competitive advantage.
8. More partners, more capital
Partners have the potential to invest their combined resources into the business to help fuel its growth, so the more partners, the more money available. They will also have a greater borrowing capacity together.
9. Prospective partners
You cannot manage your business alongside someone else as a sole trader, despite being able to hire staff. Good people may feel demotivated if they believe they have nowhere to go in their own career, since they will always believe that you will be the one running the business.
As opposed to general partnerships, which usually allow new partners to join. Having the possibility of becoming a partner at some point makes for a good incentive for good employees to join the business.
10. Easy access to profits
Businesses are often formed as partnerships, in which the profits are shared among the partners. As opposed to initially being retained in the partnership, these funds are passed directly to each partner’s individual tax returns. Profits in a limited company, however, are retained until they are paid out, either through salaries under PAYE or dividends after shareholder approval.
Disadvantages of a business partnership
A partnership business model has several advantages, but it also has some significant disadvantages.
1. The business has no independent legal status
The legal existence of a business partnership is dependent on the partners. When a partner resigns or dies, a partnership will automatically dissolve unless an alternative partnership agreement is in place. Often, the remaining partners are not happy with the outcome of such a scenario, as it can cause insecurity and instability, divert attention from developing the business, and may be unwelcome for the business itself.
Partnership agreements may not allow the remaining partners to buy outgoing partners’ shares of the business, even if there is a partnership agreement. It may still be necessary to dissolve the business in that case.
2. Unlimited liability
Since the business does not have a separate legal personality, the partners are personally liable for debts and losses if the business runs into trouble. Your personal assets may be at risk of being seized by creditors, which would generally not be the case if the business was a limited company.
There are joint and several responsibilities among the partners. You could be held liable for the actions of the other partners because one partner can bind the partnership. As a partner, you will be responsible for paying debts if your partners are unable to do so. As an extreme example, if your partners do not have assets, you might be forced to sell your possessions in order to settle 100% of the partnership’s debts if you only own 10% of the partnership.
3. Perceived lack of prestige
In comparison to a limited company, the partnership business model appears to lack the prestige of a sole proprietorship. Despite the fact that many partnerships last a long time, they can appear to be temporary enterprises, especially because they are unable to exist independently apart from the partners themselves.
There can be a tendency to perceive more risk in partnerships due to their impermanence and their inability to be independently verified by Companies House. In certain industries, clients (especially those in limited companies) are more likely to prefer limited companies to partnerships.
4. Limited access to capital
Partnerships often find it more difficult to raise funds than limited companies, even in cases where they can combine capital more readily than sole traders.
Limited companies provide greater accounting transparency, separate legal personalities, and a sense of permanence for banks. Generally, a bank will not lend to partnership businesses, or will only lend at less favorable terms, if they regard them as higher risk.
As a result, partnerships cannot access certain types of long-term financing. The main difference between them and limited companies is the fact that they cannot issue shares or other securities as a form of investment.
5. Potential for differences and conflict
General partnerships lose autonomy when compared to sole traders. Each partner must demonstrate flexibility and compromise in order to get their own way.
The potential for disagreement with other partners exists, whether it is big or small. Some of these may be related to:
- Identifying the strategic direction (or how to get there) for the business
- What to do when you run into any number of discrete business issues
- The amount of time, skills, and investment that partners should be rewarded according to their contribution
- Having ambition. There are some who aspire to be surrounded by their business every waking moment, while others desire a more relaxed lifestyle
It might take a while for differences to become apparent. The fact that partners are aligned at the start does not guarantee there will be no cracks later on because preferences, personal situations, and expectations can change.
In addition to damaging the business, disputes between individuals can harm their relationships as well. It can take a lot of effort, energy, and money for a partnership to resolve a conflict.
The partnership agreement (also known as the deed of partnership) is generally drafted as a part of the formation of a business partnership. The document enshrines each partner’s rights and responsibilities and outlines the procedures to be followed during a dispute to ensure that everyone is on the same page. The partnership agreement will also state what happens if the partnership must be dissolved.
6. Slower, more difficult decision making
Due to the need to consult and discuss matters with your partners, running a business as a partnership can be slower than running it as a sole proprietorship. It will take time and effort to negotiate an agreement or reach a consensus where you disagree. Opportunities might be missed as a result. A partner who has always made all of their business’s decisions is more likely to be frustrated.
7. Profits must be shared
Sole traders retain all profits from their business, while partners share profits with each other. A partnership agreement can change the default position of profits being shared equally under the Partnerships Act 1890.
It can be challenging to share profits equitably. What is the value that you place on the skills of different partners? Can one partner still take their share of profits if he or she puts in less time and effort than the other? Without a balance between effort and reward, it is easy for resentment to occur.
8. Personally demanding
Despite the existence of another partner to share the worries and the workload, partnership businesses are still essentially a partnership. Taking care of other partners’ duties can disrupt your work/life balance, especially as it consumes a lot of time and energy. don’t have such The key to the success of a limited company is it’s easier for the owners of the business – its shareholders – to appoint directors to manage the If you cover other partners’ duties and it consumes a lot of time and energy, your work/life balance can be disrupted
A limited company could historically withdraw salary and dividends under limited company ownership for less tax than a partnership drawing if the business made more than a certain level of profit. In recent years, this difference has faded somewhat due to changes to dividend taxation.
The tax planning potential of limited companies is still greater than that of business partnerships, however. The profits earned by the partnership are taxable in the financial year in which they are earned since they are income to the individual partners. Keeping profits in a partnership could result in lower incomes (and possibly a lower marginal tax rate) in a subsequent year.
It depends on your personal circumstances which business structure is most tax-efficient. If you need tax advice based on your unique circumstances, you should always seek the advice of a tax professional.
10. Limits on business development
Most partnerships are restricted in their growth by a number of other disadvantages we’ve reviewed. Business owners with modest expansion expectations won’t be alarmed by that. In the world of business, however, unlimited liability, limited financing options, and lack of commercial status are hardly perfect ingredients for massive growth.
It is also important to consider that there is no legal personality here. When the business grows, it will be harder to work around difficulties such as owning property, entering into contracts, or borrowing in its own right without it.
If one partner leaves the business at an earlier date, the business could be destroyed. Partners may have limited options to exit the business and profit from it. In limited companies, exit strategies are easier to manage, even when one or more partners sell their shares.
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