What are the advantages and disadvantages of a business partnership and what should I consider before setting one up?
What is a partnership?
A business partnership is an agreement between two or more people to fund, manage and gain shared ownership of a business. Each member can have equal responsibility and authority in the running of the business and can make decisions or represent the business independently of the other members. It is common for two or more people to form a partnership when they have a shared business idea or interest and they can both contribute their own skills, experience and funding.
The Advantages of a Business Partnership
• Business partnerships are easy to set up due to less legislation and paperwork
• Two or more people can bring their own skills, knowledge and expertise to the business.
• Easier to raise funds due to shared capital and/or a higher borrowing capacity.
• Greater flexibility and efficiency as each partner can be delegated different tasks or responsibilities depending on their skills and expertise.
• Each partner can have their own contacts and connections thereby accelerating growth of the business.
• Better brainstorming can result in greater creativity due to a larger pool of ideas.
• Can result in other employees with complementary skills and assets joining the business.
• Can be easier to manage and run as they are less strictly regulated and there are no opinions of shareholders to be taken into account.
• Having shared business partnership can be less daunting than being the sole proprietor without support.
Disadvantages of a Shared Business Partnership
• Each partner shares the liability and financial risks of the business and is individually liable for the actions of the other partners. If your partners cannot pay their debts you may be expected to pay all the debts of the business yourself.
• Disagreements on how the business should be run and the responsibilities of each member.
• Disagreements on how much profit each member should receive based on their time and skills.
• A shared business partnership can have limitations that can keep it from growing into a large business.
• The partnership may not remain long term if members decide to leave and take their share of the business or die unexpectedly.
Things to Consider:
Create a ‘business prenum’ or partnership agreement to protect the business should someone leave or die unexpectedly. This should cover all eventualities should someone want to leave the business, retire, sell his shares, separates, or dies.
You should create a deed of partnership before forming the business to ensure that there are measures in place in case of disputes or disagreements. Also a plan should the partnership end up being dissolved.