There are distinct partnership advantages and disadvantages.
Before going into the advantages and disadvantages of a partnership, and especially before starting a partnership, let’s first define what partnerships are and understand how they operate. The particular rules about partnerships lead to the advantages and disadvantages of a partnership.
Partnerships Defined and Explained
A partnership is an agreement between two or more people to finance and operate a business.
Partnerships, unlike sole proprietorships, are entities legally separate from the partners themselves. In a general partnership, however, profits and losses flow through to the partners’ tax returns.
Each general partner has equal responsibility and authority to run the business. Each partner should be involved in the day-to-day operations of the business and should make management decisions.
Any partner may represent the business without the knowledge of the other partners—the actions of one partner can bind the entire partnership. If one partner signs a contract on behalf of the partnership, the general partnership and each partner are responsible for that contract. The shared ownership concept that characterizes a business partnership gives it certain distinct advantages and disadvantages.
Partnerships are relatively easy to establish; however, time should be invested in developing the partnership agreement. In a partnership agreement, the following arrangements, among others, should be spelled out:
- How the business will be financed
- Who will do what work
- What happens if a partner dies
- What happens if one or both partners want to dissolve the partnership
It is strongly recommended that an impartial attorney be contacted to write the partnership agreement. Here’s how to find the right attorney.
Related: How to Form a Partnership
Advantages of a General Partnership
Partnerships are relatively easy to establish.
- With more than one owner, the ability to raise funds may be increased, both because two or more partners may be able to contribute more funds and because their borrowing capacity may be greater.
- Prospective employees may be attracted to the business if given the incentive to become a partner.
- A partnership may benefit from the combination of complementary skills of two or more people. There is a wider pool of knowledge, skills, and contacts.
- Partnerships are not subject to income taxes. The profits or losses of the partnership are passed to the owners who report them on their personal income tax return.
- Partnerships can be cost-effective the startup costs and expenses are shared among the partners.
- Partnerships provide moral support and will allow for more creative brainstorming.
Disadvantages of a General Partnership
Business partners are jointly and individually liable for the actions of the other partners.
- Profits must be shared with others. You have to decide on how you value each other’s time and skills. What happens if one partner can put in less time due to personal circumstances?
- Since decisions are shared, disagreements can occur. A partnership is for the long term, and expectations and situations can change, leading to dramatic and traumatic split-ups.
- The partnership may have a limited life; it may end upon the withdrawal or death of a partner.
- A partnership usually has limitations that keep it from becoming a large business.
- You have to consult your partner and negotiate more as you cannot make decisions by yourself. You, therefore, need to be more flexible.
- A major disadvantage of a partnership is unlimited liability. General partners are personally responsible for any acts of negligence and the debts and obligations of the business. To protect the owner’s personal assets, a different form of business structure such as a corporation or LLC would be in order.
If you Decide on a Business Partnership…
…you should create a partnership agreement that will protect a business if someone leaves.
This partnership agreement should spell out what will happen to your company if a co-owner:
- Wants out of the business
- Wants to retire
- Goes through personal bankruptcy
- Wants to sell his shares to someone else
- Goes through a divorce
- Passes away