A partnership is a type of business owned by two or more individuals who share the profits and losses of the business.
There are two (2) main types of partnerships:
- General Partnership
- Limited Partnership
In a general partnership, all partners have unlimited liability for the business’s debts. They are personally liable for all obligations of the firm. The general partner manages the company, receives a salary, and shares the firm’s profits or losses.
In a limited partnership, some of the partners have limited liabilities. They share the firm’s profits or losses but do not actively manage the company. The limited partners will only be liable to the extent of their contribution (of capital).
Advantages of Partnership
Partnerships have several advantages that make them an attractive option for entrepreneurs:
Increased resources for capital: More than one owner provides funds for the business, allowing partners to pool their wealth and resources.
Distribution and sharing of business risks: Partners share responsibility for the success or failure of the business, with any losses absorbed by more than one partner.
Direct rewards: Partners are motivated to put forth their best effort as they will directly share the company’s profits.
Taxation advantage: Most partnerships pay taxes as individuals, which can result in a lower tax rate than that assessed against corporations.
Combined talents and business acumen: All partners’ abilities are combined to cover various skills, ideas, and expertise.
Ease of formation: A partnership can be established by meeting only a few legal requirements.
Ability to specialize: Partners can focus on their area of specialization, which can improve efficiency.
Disadvantages of Partnership
There are also some disadvantages to forming a partnership:
Unlimited liability: At least one partner must assume unlimited liability, meaning all partners are personally liable for the business’s debts.
Limited life span: The partnership may end if any one of the partners has a mental disorder, falls bankrupt, resigns, or dies.
Lack of continuity: If any partner dies, is judged insane, or withdraws from the business, the partnership arrangement ceases.
Shared profits: The partnership’s profits will be shared among all partners.
Shared control: Partners may have differing views on how the business should run, which can delay the decision-making process and create ill will among the partners.
Conflict: The tendency for disagreements and conflicts to happen is high, as the actions of one partner will affect other partners as well.
A partnership can be an excellent way to combine resources, expertise, and ideas to start a business.
However, it is important to carefully consider the advantages and disadvantages before entering into a partnership agreement.
It is always a good idea to seek legal counsel to prepare a partnership agreement that outlines the roles and responsibilities of each partner, conditions of termination, and means of resolving intra-partner disputes.