Advantages and disadvantages of a partnership
A partnership business is one of the most common types of business that entrepreneurs opt for. The most common alternatives to partnership business are sole proprietorship and LLCs. Business partnership models let you run a business with someone you can bank on sharing similar ideas and transform them into actions. On the other hand, partnership business also let your business partner access control of the process partially. It’s better to consider the advantages and disadvantages of a partnership before fixing a deal.
Key to a Business Partnership
Being in a business partnership means the business owners have to share the profits and liabilities and exchange opinions. It’s not necessary to gain benefits in a business partnership. Many business partnerships are likely to dissolve due to lack of participation, sour relationships, or even lack of understanding.
All the owners must agree to the pros and cons while discussing the business prospects and scope to make a partnership. The key is to balance the equation to be able to run a successful business operation.
Advantages of a partnership in Business
If you are about to invest your time and money in business collaboration, do a thorough analysis of the advantages and disadvantages of a partnership. Begin with theoretical aspects of all the possible advantages that might apply to your current situation. A partnership has many benefits to offer depending on what sector you are into and how it's planned.
1. Business Partnership is easy to start
Partnerships can start over a coffee, write the idea on paper and execute the idea once the critical aspects like motive and execution plan are discussed. Partners can register for self-assessment online without registering with Companies House and registering the business partnership through complex processes.
Putting a partnership deed or agreement and stakeholding may take some time and finances, but it’s still advantageous over starting a new company on your own. Documenting several aspects such as how the partnership will work, the rights and shares of responsibilities, and a backup plan for various possible situations can be discussed prior to any investment.
2 Sharing Equal Responsibilities
Signing a partnership agreement means sharing the challenges of running a business equally. Once you are into an agreement, you are bound to give your 100% to propel your capabilities and become an equal shareholder. You can share tasks among the partners depending on skills acquired.
You can distribute responsibilities such as accounting, management, marketing, or development as per a person’s ability. These advantages of business partnership outweigh the shortcomings of a sole proprietorship. Managing a business single-handedly and be daunting, especially if you’ve no experience.
3. Brainstorming and Skill Development
Each partner has a specific skill set when brought to the desk, which will be helpful to others. Bringing their own knowledge, skills, experience, and contacts to the business will potentially give your business a better chance of success.
Sharing tasks based on their expertise, such as bookkeeping, management, and sales, in a partnership-based business is highly beneficial than the one owned individually.
4. Better decision-making ability
Two are always better than one when it’s about heeding to every opinion. Compared with sole proprietorship, a partnership business benefits in bringing varied opinions and leading to better decision-making. Given that every partner has the equal opportunity to lay forth possible propelling ideas, they can give a unique perspective to the proposed business model.
A combined decision is far better than working on separate opinions as there will be conflicts which is not a good indicator to run a business. More brains at work means more business ideas to solve the problems that business may encounter.
5. Shared Investment
Every business needs a capital investment that can’t be made individually unless you have done that before. After entering the business based on partnership, the individuals are collectively responsible for sharing the expenses. That’s the first ethic of conducting business partnerships while sharing responsibilities.
Shared investment in partnership business overcomes the funding limitations you may face in a sole proprietorship. A shared funding also gives the business more flexibility and more potential profit, which will be equally shared between the partners.
What are the Disadvantages of Partnership in Business?
With several advantages come some disadvantages of partnership in Business that need attention. These problems can only be solved by a team working together. Many Businesses fail despite having plenty of financial back-ups, perhaps due to inadequate relationships in the family or friends groups.
Disagreement among partners is one of the clearer disadvantages of a partnership. Two persons can have the same idea, but not everyone cannot have the same opinion about a business model.
Running into disagreements is pretty common in business partnerships that may result in a conflict of interests and disputes if not talked out timely. This is why it’s better to draft and sign a partnership deed to ensure that everyone is aware of the protocol and contingency in case of disagreement and dissolution.
Partners in a business are equally responsible for bearing financial risks, such as debts and losses. Due to unlimited liability, partnership in business is more disadvantageous than LLCs or sole proprietorships. You might have to pay for the mistake or your partners. The financial burden may pile up if your partners are unable to settle debts.
Since the business model does not have a separate legal personality, your personal assets may be at risk of being seized by creditors and private lenders in case of business failure. Whereas, this may not be the case if the business is a limited company.
3. Taxation Laws
Taxation laws are one of the major disadvantages of a partnership, as partners are bound to pay taxes in the same way as sole proprietors. Even if your business is based on partnership, you’ll have to submit a self-assessment tax each year. Even worse is that you’ll have to register yourself as self-employed with the state.
Even though you generate the income through a business partnership, it’s still recognizable as personal income. The fees under personal taxation may be higher for partners if they make more profits through business partnerships. That’s why setting up a limited company is always a suitable option if you want to save on taxes.
4. Profit Sharing
Not only do partners have to share responsibilities and risks, but they’ll also have to share the profits too. Provided every person executes his responsibilities well, the profit-sharing can lead to inconsistencies where some partners get the share if they don’t.
Nobody would want to give a share of their months’ rewards to the one who was out of the picture for any reason. Sole proprietorship, on the other hand, gives the owner full reward as they single-handedly do the business.
Like a sole proprietorship, a partnership business is suitable for small organizations with low capital requirements. The bigger your company is, the better is it to get it registered with the state or federal authority. If you are into Law, Accounts, Medicine, or real estate, you can consider a partnership with your friends or relatives. The rest is explained by the advantages and disadvantages of a partnership in whatever business you choose.