A partnership is a legal form of a business operation that is between two or more individuals who will share management responsibilities and profits. There are several types of partnerships that are recognized by the federal government, but the two most common types are general and limited partnerships.
It is easy to establish a partnership. Time should be invested by all partners to develop a partnership agreement. The partnership agreement should include the following sections:
- Which partner will do what work
- Where will the finances come from
- What happens if a partner dies or sells
- What happens if one or all partners want to dissolve the partnership
Advantages and Disadvantages of Partnership
As with any aspect of business, partnerships have several advantages and disadvantages. Each one needs to be carefully weighed when considering starting a partnership.
Advantages of Partnership
Here are several top advantages of partnership:
- Easy to Establish: Partnerships should have a partnership agreement drawn up prior to opening the business for operation.
- Potential Financing is Increased: By having more than one owner there is the ability to raise funds from different avenues. Partners may be able to contribute more funds and the borrowing capacity can be greater.
- Partner Incentive: Employees may be attracted to the company if there is an incentive to becoming a partner. Law firms many times offer this type of incentive for their lawyers.
- Complimentary Skills: Partners will hopefully have complementary skills to allow for a more diverse workload. With two or more partners there is a larger collection of skills, knowledge and professional contacts.
- Cost Effective: When there are partners who can specialize within certain parts of the business, the business as a whole becomes more cost effective. Partners with the same skill sets will need to bring in executives to oversee other parts of the business, but partners who can work within different areas of the business do not need extra executives.
- Creative Brainstorming: When there are two or more partners, each one brings a certain creativeness to the table. By working together and brainstorming together they add more support to each other and get more things done.
- Income Splitting: The opportunity for income splitting is an advantage that is of particular importance due to resulting tax savings of a partnership.
- Limited External Regulation: Partnerships are not subject to the same stringent regulations that corporations are. Government regulations are not largely imposed on partnerships.
- Easy to Change Legal Structure: The legal structures of a partnership can easily and relatively quickly be changed if the partnership is to be dissolved. It is also relatively easy to change a partnership into a corporation.
- Business Affairs are Private: Each partner retains privacy in regards to business affairs. Corporations must disclose business affairs to the public, partnerships are not required to do so.
Disadvantages of Partnership
Partnerships have their disadvantages and some people may feel that a partnership is not the way to go. Some major disadvantages of partnership is listed below.
- Partners are Liable: In a business partnership, the partners are jointly and also individually liable for the actions of all the partners. A dishonest partner can cost the other partners as their actions directly affect the partnership.
- Shared Profits: The profits of the partnership must be shared with the other partners. This is where a partnership agreement is imperative because it determines how the profits are disbursed among the partners.
- Disagreements: When decisions are shared disagreements will happen. As the business grows and evolves, the expectations of the partnership can also change. If the partners are not flexible and willing to change then traumatic or devastating splits can occur.
- Limited Life of Partnership: Some partnerships are set up with a limited life. This means that the partnership may end or be dissolved upon the withdrawal or death of a partner.
- Negotiations with Partners: When decisions have to be made, the partners must consult together and then negotiate with each other to come to an agreement. Each partner needs to be flexible and put the best interest of the business first.
- Partnership Limitations: Most partnerships will have limitations imposed on them to keep the business from becoming too large.
- Unlimited Liability: Unless the partnership is set up as a limited liability partnership, it has unlimited liability. General partners are liable without limit for all debts incurred by the business as well as any errors made by the business. If the other partner or partners are unable to pay their portion of the debt, it falls to you to pay the remaining debt. All personal assets can be seized to pay off debts.
There are many good things about creating a partnership and the advantages are many. However, unless it is formed as a limited liability partnership, the disadvantages can be too much for a person to commit to.