Business Partnership Pros and Cons: All You Need to Know

Starting a business and building it up is challenging, whether as a sole proprietor (alone) or with others, as a partnership.

Doing business with one or several people is referred to as a partnership. Regardless of how many people are involved, there must be a clear understanding of how a business must be run.

The business partnership strategies are put down on a partnership agreement.

A business partnership with mutual benefits between two or more professionals who share business ideas, risks and rewards is a formula for success.

When properly executed, it can offer new opportunities to expand your business, get more customers, raise profits, and conquer the market.

No business venture is a straight path, but understanding the ins and outs of each partnership is important to help those interested make the right choice. Don’t miss out on this insightful guide on the benefits and drawbacks of a business partnership and the factors to consider when choosing the formation.

So, if you’re still wondering if you’re in the right place, you are.

What Is a Business Partnership?

A business partnership is a business structure owned by two or more individuals to create a business and work together.

The business structure allows partners to have equal rights and responsibilities in the business.

Although a business partnership is the best choice for multiple people, there are other formations you can venture into. Let’s look into the types of alliances and related pros and cons.

General Partnership (GP)

It’s the easiest and cheapest partnership to form, yet simple to dissolve. A GP can have two or more general partners who own it. The partners have joint legal liabilities in obligations and debts. General partners manage and control the business together, sharing liabilities and benefits.

Once partners come together to start a partnership, the business can start immediately, even without a written agreement. However, starting a business without a contract can be costly, especially when disputes arise, and the partners can’t settle them amicably.

Limited Partnership (LP)

In this partnership (LP), some partners have limited liabilities on debts and obligations, and one is a passive contributor of money and assets.

LPs allow contributors to invest without legal liability, especially in jurisdictions where a business partnership structure is considered a separate legal entity. It means they can sign contracts and take on responsibilities.

An LP has at least one general partner with unlimited legal liability who manages and controls the business.

Limited Liability Partnership (LLP)

A Limited Liability Partnership (LLP) is like a general partnership, but all partners have legal liabilities. The partners in this type of partnership are protected from any wrongful acts by other partners, like negligence, unprofessional conduct, or misbehaviour.

In the jurisdictions where the business structure is available, it’s considered a separate legal entity that can sign contracts and take responsibility.

Local authorities in these jurisdictions can restrict professionals like doctors, lawyers, and accountants from operating such businesses. Why? The professionals must present licences and permits as proof of qualification before forming an LLP.

The Pros of a Business Partnership

If you want to grow a business, venturing into a strategic business partnership can be key as it yields multiple benefits. For this reason, understanding what to expect from a business partnership will help you leap in the right direction. Here are the benefits of a business partnership.

1. Sharing Expertise and Knowledge

Going into business with a resourceful partner can greatly benefit your business. A good business partner will bring new business ideas, extra knowledge and experience to grow the business.

For instance, you may be a tech whiz or a great salesperson, while your business partner is best at building relations and helping in business operations. Hence, the right business partner will complement your weak areas with their skill and understanding.

2. Less Financial Burden

Partners contribute capital to start a business. Hence, getting funds together for partners is easier than in a sole proprietorship structure. Besides, you might partner with someone with more connections than yourself, meaning they can attract better investors or raise more capital.

For any business to expand, funding is important; picture a situation where partners can do twice as much as a single person. Even initially, the company can afford more things upfront without borrowing because the expenses and capital are split.

3. Pursue More Business Opportunities

Sharing labour between partners opens more business opportunities. Having a business partner can make you more productive and allow you to explore other business opportunities to help your company grow. Here are some examples of new opportunities you can pursue:

• Study your competition and expand your offerings
• Research industry trends to win over more investors
• Understand leads, market trends and a chance to rebrand

With a partnership, it’s easy to eliminate opportunity costs, which, in other circumstances, you may be forced to forgo because you lack the bandwidth to concentrate on.

4. Sharing Responsibilities

Having a business partner lightens the workload since it’s split among multiple individuals, each with a different responsibility. You may be able to take time off whenever you need it, bearing in mind that someone is holding down the fort. As a result, you have a positive balance between your job and life.

When starting a partnership, you discuss how to divide the workload and get tasks accomplished faster rather than doing it alone. Sharing responsibilities can increase productivity, making your business more efficient.

5. Less Paperwork

Starting a partnership is easy and cost-effective since you don’t have to file much paperwork with the federal government. All business partners must sign a partnership agreement, a legal document outlining how the business will function.

The agreement also details the duties and responsibilities of every partner, how they’ll make decisions, and share profits and losses. Creating a partnership agreement is simpler than presenting paperwork for other structures to Companies House or HMRC.

6. Fewer Tax Forms to File

Partnerships don’t have to pay additional taxes, meaning there’s no more paperwork to fill out and file business tax forms. Instead, taxes are done by business owners, where you must share profits and losses on your tax return. Hence, partners have to pay for any additional taxes.

7. Emotional Support

Running a business is hectic, whether small or established. However, when you have someone to share ideas with, it lifts the burden off your shoulders.

Other times, a partner is there to celebrate small or significant achievements and navigate setbacks to do better in the future. Pairing with a trusted business partner adds value to your business.

8. New Perspective

When working alone, you can easily have blind spots as you conduct your business. However, with a business partner, you have a new set of eyes that can see what you might have missed.

Different people may have varying opinions on the same subject, giving a new outlook on handling issues, the markets to pursue, and how to set prices. A partner can inspire you to surpass the status quo and traverse new opportunities.

The Cons of a Business Partnership

Although business partnerships have many benefits, the structure also has some downsides. While some drawbacks may be unavoidable, understanding them will help you decide if a partnership is the kind of business you want. When you’re well informed, identifying and mitigating the drawbacks can make the structure worthwhile. Here are the disadvantages you’ll likely experience in a partnership business structure.

1. You Can’t Make Independent Decisions

In a partnership, decision-making can’t be independent because you must run everything by your partner (s). No independent acts, no matter how right you think you are. If any partner acts alone and makes a reckless decision, the other partners are liable for the outcome. Whoever made the reckless decision can’t be solely responsible for it.

2. Disagreements are Common

Partnerships are prone to conflicts, which are common when more people work together. You might even tire of working with some partners, yet you’re together in business. However, when disagreements are too frequent, and the situation is dire, dissolving the partnership may be the only way out.

Remember the business agreement? Hopefully, you have drawn up, as this is when you need it as an exit strategy. As the partnership gets dissolved, profits and losses must be redistributed among the remaining partners (if any).

3. Splitting Profits

Unlike a partnership where partners share profits, sole traders have all earnings to themselves. Profits can get fairly small depending on the number of partners in a business. Partners can decide how to share the profits equally or spend on their duties.

4. The Business Isn’t a Separate Entity from Partners

Before the law, a partnership and its partners aren’t separate entities. All partners are bound by the law to be legally and financially responsible for the business. If the partnership encounters legal issues, the company and the partners are considered one entity. If the situation gets out of hand and the industry can’t settle debts, debt collectors can go after partners’ assets.

5. Taxation

Business partnerships are taxed as individuals, meaning the rates are higher. In partnerships, the taxes are passed on to partner(s), which might attract more taxes than when paid collectively at the business level.

Every partner reports their income and losses when filing their annual tax return and then pays individual taxes, which include the business’s earnings.

Partnership earnings are deemed self-employment tax rates, meaning, in the end, taxes may be higher than those of a differently structured business.

Factors to Consider Before Entering a Partnership

There are many benefits to entering a partnership. However, before the huge leap, there are factors to consider, such as liability and profits. Other factors include:

• Handling working partner relationships no matter the situations
• Decide whether you’re comfortable sharing profits and management roles with others
• Assessing future stability as the partnership grows and changes
• Gauge potential consequences if the day comes to dissolve the partnership
• How to redistribute or reclaim assets when a partner departs

What Is a Partnership Agreement?

If you plan to enter into business with one or more people, it’s advisable to be on the same page concerning business operations. A written partnership agreement is the best way to do this upfront. So, what is a partnership agreement?

It is a legally binding document that states how to run a profit-making business that two or more people run.

The document dictates:

• The responsibilities of every business partner in the business
• How much each partner owns in the business
• How to allocate profits and losses
• The rules on how to manage the business
• Potential situations that could affect the business, like the death of a partner
• How a partner can leave the company

A partnership agreement’s primary purpose is to provide answers to issues that could arise during business. It also helps partners resolve disagreements that can put them at odds or cause the resolution of a company.

The Importance of a Partnership Agreement

A partnership agreement is important as it protects investors and aids the company’s governing. Here are more reasons as to why a partnership agreement is necessary:

• To guide how to handle different matters and to reduce future misunderstandings.
• The document overrides the default provisions of The Partnership Act 1890 (The Act), which controls partnerships without a partnership agreement.
• It prevents future expenses that the partnership can incur when resolving partner disputes.
• Making the terms of a partnership
• Responsibility distribution depends on the ability.
• Specifying the financial contribution expected from every party
• Deciding which partners can approve business decisions
• Stating power levels and management roles
• Establishing voting rights among partners
• Creating eventualities on money-related issues or questions that can arise
• Clarifying exit strategies when parties decide to leave the partnership

Contents of a Partnership Agreement

A partnership agreement is like any other contract, and it should include these basics:

• Business name
• Description of a business
• Contact information - business and owners

Besides these basics, a partnership agreement should cover different scenarios a business can face. Here are the clauses the agreement should address:

• Ownership
• Decision-making
• Capital contribution
• Losses and profit distribution
• Death and disability
• Withdrawal or addition of a new partner

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Frequently Asked Questions

What are the risks of a business partnership I should know about?

The most popular risks of a partnership include misalignment of goals, loss of autonomy, expectations, values, and conflicts between partners. However, the structure has powerful benefits that can help grow and expand your business.

Are profits in a partnership divided equally?

In a partnership, profits are shared in three ways: ration, equally, and salary plus sharing. Equal sharing allows all partners to receive the same profit, regardless of contribution. As for ratio sharing, every partner gets a percentage of the profit depending on their contribution value, while a salary plus is when partners receive a salary plus a share of the remaining profits.

Do partners have a salary?

Partners don’t get a salary but earn from business profits. The income partners earn is outlined in a business agreement, explaining why the document is necessary when entering a partnership.

In Summary

A business partnership is a legal agreement between two or more people who agree to work together. Partners can share business ideas, rewards, responsibilities, and liabilities.

When done right, a partnership can grow a business fast and maximise profits, but it’s only smooth when partners have a written partnership agreement.

A partnership agreement is like a set of instructions that outlines matters like how the partnership will be run and the division of responsibilities among partners.

A business partnership is affordable and easy to start, but it’s important to write down all important matters concerning the business.

Different people run partnerships and are prone to disagreements. These disagreements can be easily resolved through a partner’s agreement. However, business partnerships have many benefits and disadvantages that you should know about before deciding if it’s the right fit for you. Contact Incorpuk if you have any questions on business partnership.