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The Advantages & Disadvantages Of Business Partnerships

Advantages And Disadvantages Of Business Partnerships

Business Partnerships are a type of company structure in the UK, often seen in professional services like Solicitors, Architects and GP practices. 

A Partnership is when two or more people join forces to create a business and in this type of structure, each person in the partnership shares joint liability and responsibility for business growth and debts. 

It’s very important therefore that partnerships trust each other fully, can communicate and work well together, whilst having legal protections in place in the form of a partnership agreement. 

Advantages

Forming a partnership has various benefits. Here are some of them:

  • Shared responsibilities
  • Combined resources and skill sets
  • Mutual encouragement
  • Divided Risks
  • Increased Business Trust

Disadvantages

  • Differences in opinions and goals 
  • Conflicts
  • Limited control over the business 
  • Risk of unequal efforts
  • Liability for each other’s debts and other obligations.

Read on for more details on the advantages and disadvantages of business partnerships so that you can make an informed decision if this business structure is right for you.

What Is A Business Partnership?

A partnership means two or more individuals or companies set up a business together. They become joint owners of the business meaning that they share any profits and losses incurred. Partners share equal decision-making responsibility in the day-to-day operation of the company. 

Partnerships can range from casual verbal agreements to signed contracts. When signing a partnership agreement with your friends, workmates, or even family members, there are important details that must be stipulated in the contract. This includes each of the partner’s rights, duties, pay terms, as well as their ownership percentage.

Advantages

Forming a partnership can offer many advantages if you choose the right partner. You spread your financial risk, whilst pooling ideas, expertise, and skills. 

Shared workload 

With multiple partners managing a business, workload can be spread across more than one person. This means that more work can be completed in the same amount of time as it would take one person to complete the same task.

This advantage means that the business can diversify the type of work and clients that it brings in. If you have different skill sets or expertise amongst partners, each will be more suited to a particular area of your service delivery, whilst still enjoying the benefits of having a supportive team behind them. 

For example, one person may have HR experience, one may be a whizz with marketing, while another has a great head for numbers – this all adds up to a well-equipped management team. 

By being able to spread the day-to-day workload across the partnership, more time is available to discuss bigger projects and strategies that will work to build and drive the business forward. 

Pooled Resources 

Being able to pool resources is an excellent benefit of working in a partnership. From finances, to supply networks, business connections, and assets, being able to combine these valuable complementary areas into the business can help to grow the business much more successfully than if you were working alone. 

Increased Expertise 

Being in a business partnership means you’ll have access to more resources and talents. With each partner contributing his/her unique skills and expertise, you’ll be able to double down on your strengths.

Motivation & Support

Each person in the team will bring their own life experiences and professional areas of knowledge. This means that when it comes to big business decisions, the partnership can seek motivation and support from others on their side when needed. 

This is great when you want to brainstorm ideas, understand if an opportunity is worth pursuing, or need accountability to stay on track. This benefit is particularly beneficial should the business hit hard times. 

Spreads Risk 

If things go wrong and business debts rack up, this is shared amongst the partners and doesn’t have to be a burden to one person. 

Credibility & Trust 

Customer perception and experience are very important when it comes to business and a partnership is a type of business structure that can help to build credibility in this area. Customers who see business partnerships often assume there is a good level of competency and trust within the business. As a result, some may be more inclined to spend their hard-earned cash with this type of business, over a sole trader set up for example. 

Disadvantages

Despite the advantages mentioned above, business partnerships also come with possible drawbacks that are worth considering as well. One of the biggest risks is disagreements as this can derail the relationships within the partnership. 

Differing Goals

Every business professional has their own goals. If fellow partners have vastly different visions, plans and ways of doing things, then this could lead to partner disputes. 

It’s important therefore that partnerships promote open discussion and freedom of speech so that each person feels able to say their piece without losing the respect of others. 

Disagreements

Nobody agrees with everyone else all the time but when disagreements can’t be talked through, overcome, or progressed, then there is a risk of business progress stalling. Whilst interpersonal conflicts may cause disagreements, the key to a good partnership is being able to work through this so that business operations aren’t impacted. 

Limited Control

In a partnership, each person has to be willing to share the decision-making for the business. No one person can override another unless there is a managing partner with a larger stake in the business. Otherwise, all decisions need to be made jointly and with the ‘bigger picture’ in mind. 

The problem is reaching a full agreement usually takes time especially since you have to consider every view of your partners. People who are used to being completely in charge may struggle with this. 

Unequal Contributions

Perceived imbalances in workloads and rewards may lead to feelings of resentment among partnerships. To avoid this becoming an issue, it’s important to be clear from the offset what the division of duties, responsibilities, and contributions for each partner is expected to be. 

Shared Liability For Debts

All partners share collective accountability for debts and liabilities.  So, if one person mishandles the cash and other assets, everyone will be affected. 

When People Want To Leave

Ending a partnership can be messy when one person decides to leave. If for instance, a partner passes away, becomes disabled, or simply wants out, the other partners may struggle to keep things running smoothly or may not be able to afford to buy the person out. 

To ease this process, have clauses in the partnership agreement set out that address these scenarios and the process that will be followed. 

 

Types Of Business Partnerships

There are a few different types of business partnerships available to business owners. Whilst they all involve two or more individuals or businesses joining forces, there are differences in the way the business operates after it is set up. 

The most common types of business partnerships are limited partnerships (LTD) and limited liability partnerships. (LLPs) 

 

Limited Partnerships

A limited partnership is a type of partnership business structure. It offers a good balance of operational freedom within a scalable business model, with some financial protection. 

Limited partners are only liable for the amount of money that they have invested and within this structure, there must be at least one general partner and one limited partner. 

General and limited partners have different responsibilities and levels of liability for any debts the business can’t pay, but all partners pay tax on their share of the profits. The general partner is responsible for the business and has unlimited personal liability (like a sole trader would) while limited partners have protected liability that exceeds their capital invested. 

Limited partnerships manage their profits and losses through each person’s taxes. The general partner pays self-employed taxes on earnings and the limited partner pays ordinary income tax rates. 

Limited Liability Partnerships (LLPs)

Limited liability partnerships (LLPs) share similar attributes with limited partnerships while providing liability protections to all partners. 

In an LLP, partners enjoy the limitation of personal liability to their invested capital, even as they participate in running the business. So if an LLP incurs substantial debt, partners do not have to bear it beyond their initial investments.

LLP partners pay taxes proportionate to their business share profits. The major advantage of this structure is that personal assets stay protected in case of business losses or liability issues.

Which Types Of Businesses Suit Partnerships?

Launching service companies and manufacturing plants requires a hefty upfront capital. This can be challenging for solo founders which can make them well-suited to partnership business structures.. 

Service businesses like law firms, restaurants and home-cleaning businesses can be well suited to the shared ownership model of a partnership. In this setup, partners divide operational duties. They also mentor staff and oversee departments based on their strengths.

Costly ventures such as manufacturing, retail stores, and tech startups can also benefit from partnerships because such ease funding burdens.

However, partnerships are not ideal for businesses requiring unified creative direction and client interactions. For instance, design studios, PR agencies, consultants, and authors often avoid partnerships to retain decision authority. This also allows them to safeguard their branding.

How To Set Up A Business Partnership

If you’re planning to start a company with a partner or partners, you’ll have to do some groundwork before you can formalise your business alliances. First, you have to identify your needs as a co-owner. 

Are you seeking a partner with complementary expertise or are your needs in the investment funding? Once you’ve determined your compatible collaborators, follow these steps in structuring a legal business partnership in the UK.

  • Select a business name and have it registered with the Companies House.
  • After that, draft a partnership contract stipulating each partner’s duties and stakes.
  • Appoint one ‘nominated partner’ to handle taxes and record keeping.
  • Register with HM Revenue and Customs (HMRC).
  • After successful registration, open a business bank account. Process any necessary permits and licences.

Do remember that steps may vary slightly for a limited partnership and LLPs. However, following the HMRC guidance, you can easily establish your business partnership in the UK.

 

How to End A Business Partnerships

At some point, every business partnership will wind down. It could be due to a number of reasons– irreconcilable differences, the death of a partner, or retirement.  

When closing a business partnership, the biggest steps to follow involve limiting legal liabilities, dividing debts and assets equitably, and mapping out exit strategies. To make this process less stressful and more efficient, consider hiring a lawyer to draft a binding dissolution agreement. 

This contract should include details on how you will distribute assets and pay debts. Once signed, the dissolution agreement must be fully executed. If for instance obligations are not met, wronged partners may pursue legal actions.

Remember, open communication is key when it comes to ending a business partnership. It’s likely that your paths will cross again, so being able to leave, without any bad blood or loose ends is the ideal situation. 

Summary

Business partnerships are a popular type of business structure that allows two or more people to form a business together. They’re a collaborative venture that pools funds, knowledge, expertise, strengths and assets, but losses must also be shared. 

The main positives are the increased capacity for workload, and being able to scale up and access a wider collective skillset. On the downside, each individual must be able to share decision-making and be comfortable with not having direct control. 

The key to a successful business partnership revolves around communication, being able to work well with others, overcoming difficulties, and making sure that personal preferences and mindset suit this type of working agreement with others. 

 

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