A partnership is a type of business ownership that is formed by two or more people for commercial activity as partners. It is an appropriate form of ownership to opt if your business needs more resources and talented people than a sole proprietorship and at the same time, it doesn’t need much fundraising or capital like a corporation.
Partnerships are often used by professionals like accountants, architects, lawyers, and engineers.
Types of Partnership
Generally, in a partnership, the partners agree to combine their financial, managerial, and technical abilities to run the business into profits. However, depending upon the type of partnership the roles of partners and their liabilities differ.
The General partnership is the most common type, where all the partners of that firm have a joint authority to make the decision and are actively involved in running the business. At the same time, all the partners are also liable for the financial obligations of that business.
The risk involved in this type of partnership is that, if a business fails and goes bankrupt, all the partners are unlimitedly liable to pay the debts.
Coming to the limited partnership, only one or two partners take most of the responsibilities of the business and acts as the general partners, while the other partners in the firm act as limited partners who do not involve much in the business activities.
In this type, the general partners have unlimited liabilities, just like in the regular partnership or as a sole proprietor. But the limited partners have limited liability to the amount that they have invested in the business.
Limited Liability Partnership (LLP)
This is another type of partnership that is created to protect individual partners from the mistakes or even malpractices that are done by other partners in firm.
In LLP, every partner has the authority to make the decisions. However, they are only liable for the mistakes or actions of their own, but not for the mistakes done by others in the firm.
Due to these advantages, LLP has gained super popularity. However, there are some restrictions on who can form an LLP and it depends and varies from country to country and even state to state.
Master Limited Partnership
It is a type of partnership in which the ownership can be traded publicly as a limited partnership. Simply in this type, you can sell some of the ownership to the public, just like stocks. This type allows the company to raise funds.
The main advantage of this type is that they can raise funds just like a Corporation, But without any disadvantages like corporate taxation.
However, there are strict rules and rigorous process to set up this firm.
Advantages of Partnership
Easy to Establish
Forming a partnership firm is simple and easy to establish. The entire process is not that expensive and also requires less paperwork.
Only the necessary licenses, agreements, and other forms like a certificate of conducting business as partners might be required in setting up process. Also, it differs from region to region.
The entire establishment process is legal and the partners must make sure to safeguard themselves as it may involve risks like unlimited liability.
Skills and Shared Responsibilities
Unlike the sole proprietorship, partnerships have the advantage of multiple members in their firm.
You can share the major responsibilities of your business and the workload with your partners, depending upon their skills and abilities to strengthen the company.
Due to the involvement of several minds in the growth and development of the business, getting the right strategy and refining the decisions, also the implementation process becomes much effective.
An important advantage of partnership business type is regarding the financial matters of the company. You can not only increase the capital to run the business but also share the future expenses between the partners, which won’t be a burden.
It is also the same with the resources as you can quickly expand your resources to operate and grow the business.
Profits and Taxation
Partners can share their profits as per the initial partnership agreement they had made. As the agreement is legal, there won’t be any worrying situation for a partner regarding any violation of his rights.
Even the taxation in the partnership firm is simple and usually doesn’t have any extra taxes like that of a Corporation. Partners need to pay their taxes from the profit generated on their share under personal tax returns.
Unlimited Personal Liability – At least the main partner(s)
One of the main Risks involved in partnerships is the unlimited personal liability, which means the owners are not only liable on their investment but also their personal assets.
However, this may apply to the main partner(s) or for all partners depending upon the type of partnership opted.
In the case of a LLP, there are certain limitations, as explained above.
Potential for Conflict
There is a high chance that conflict may arise between the partners, mainly while dealing with ideas and business strategies. There may not be any direct conflict sometimes, but it can also be in the way of disagreement or disapproval.
Although conflicts between the partners can initially be small. However, quickly they can take a greater shape and can even hinder the growth of a business.
So, a prework on the compatibility on the potential partners, their goals, ethics, values, and personality are a must.
Expansion and Termination Issues
Another major disadvantage of a partnership firm is dealing with the issues of expansion by bringing up an additional partner or while terminating an existing partner in case if unstable or unwilling to meet the expectations of their role in the company.
Similar issues may also occur while replacing a partner who wants to sell out or retire.
It is better to have a clear plan and agreement on the partner expectations on dealing with these situations beforehand. Otherwise, these situations can even unstabilize and destroy the entire business.