A business partnership may be one of the paths you’ve considered to help grow your business or to answer your current business needs. Being aware of the advantages and disadvantages of a business partnership is a crucial step to take before venturing into a partnership.

Partnership is commonly formed where two or more people wish to come to together to form a business. Perhaps they have a common business idea that they wish to put to the test or have realised that their skills and talents complement each other’s in such a way that they might make a good business team. Forming a partnership seems like the most logical option and, in some cases, it is. Running a small business with a reasonably low turnover, a partnership is quite often a good choice of legal structure for a new business. The way a partnership is set up and run as well as the way it is governed and taxed often make it the most appealing form of business. However, there are circumstances where this isn’t the case.

Being a partnership, the business owners necessarily share the profits, the liabilities and the decision making. This is one of the advantages of partnership, especially where the partners have different skills and can work well together. However, it can obviously present some problems. Over the years, many partnerships have turned sour. Family and friends go into business together and end up falling out on a personal or business level and it all ends badly. This is one of the major disadvantages of partnerships over other business models, but it’s important to be able to balance the advantages and disadvantages.

DISADVANTAGES OF PARTNERSHIP:

In examining the advantages and disadvantages of a partnership, it’s important to weigh the possible disadvantages. Let’s take a look at some of the downsides of a partnership.

* DISAGREEMENTS:

One of the most obvious disadvantages of partnership is the danger of disagreements between the partners. Obviously people are likely to have different ideas on how the business should be run, who should be doing what and what the best interests of the business are. This can lead to disagreements and disputes which might not only harm the business, but also the relationship of those involved. This is why it is always advisable to draft a deed of partnership during the formation period to ensure that everyone is aware of what procedures will be in place in case of disagreement and what will happen if the partnership is dissolved.

* THE BUSINESS HAS NO INDEPENDENT LEGAL STATUS:

A business partnership has no independent legal existence distinct from the partners. By default, unless a partnership agreement with alternative provisions is put in place, it will be dissolved upon the resignation or death of one of the partners. This possibility can cause insecurity and instability, divert attention from developing the business and will often not be the preferred outcome of the remaining partners.

Even if a partnership agreement is in place, the remaining partners may not be in a position to purchase the outgoing partner’s share of the business. In that case, the business will likely still need to be dissolved.

* UNLIMITED LIABILITY:

Again because the business does not have a separate legal personality, the partners are personally liable for debts and losses incurred. So if the business runs into trouble your personal assets may be at risk of being seized by creditors, which would generally not be the case if the business was a limited company.

The partners are jointly and severally liable. As one partner can bind the partnership, you can effectively find yourself paying for the actions of the other partners. If your partners are unable to settle debts, you’ll be responsible for doing so. In an extreme example where you only own 10% of the partnership, if your partners have no assets you might end up having to settle 100% of the debts of the partnership and need to sell your possessions in order to do so.

* FUTURE SELLING COMPLICATIONS:

As circumstances change in the future, you or your partner may wish to sell the business. This could present difficulties if one of the partners isn’t interested in selling.

You can deal with such an eventuality by including an exit strategy in the partnership agreement. For example, you may include “a right of first refusal” should your partner decide to sell his or her interest in the business to a third party. This ensures that you retain the right to accept the offer, thus preventing a stranger from joining the business. An exit strategy can address many other issues such as a partner’s bankruptcy, disability or desire to move out of the country.

* TAXATION:

One of the major disadvantages of partnership, taxation laws mean that partners must pay tax in the same way as sole traders, each submitting a Self Assessment tax return each year. They are also required to register as self employed with HM Revenue & Customs. The current laws mean that if the partnership (and the partners) bring in more than a certain level, then they are subject to greater levels of personal taxation than they would be in a limited company. This means that in most cases setting up a limited company would be more beneficial as the taxation laws are more favourable.

* BLOCKING OF CAPITAL:

If a partner wishes to withdraw their wealth from the firm, they can not do so alone. If the other partners agree to it, only then is withdrawal possible. The partners are also not allowed to transfer their shares to someone else. If someone wants to do so, then they must get the consent of the other partners. As a result, they lose the liquidity of their investment. This is one of the significant reasons that discourage people from investing in a partnership.

* DIFFICULTY IN DECISION MAKING:

In a partnership business, the consent of every partner is needed before making a decision. From minor to major, all decisions require the approval of all partners. The acceptance of all partners is needed for policy-making choices as well. As a result, the partners are unable to make spontaneous or quick decisions regarding the firm.

* DIFFICULTIES OF EXPANSION:

It is difficult for a partnership firm to undertake modernization or expansion of its operations because of its inability to raise adequate funds for the purpose. Limited membership (restricted to 20) and their limited personal resources do not permit large amounts of capital to be raised by the partners. Therefore, large-scale business cannot generally be organised by partnership.

In analyzing some of the advantages and disadvantages of a partnership, you may conclude that the advantages outweigh the disadvantages. What’s more, some of the disadvantages of a partnership may be overcome with due diligence, proper investigation and a detailed, written, business agreement.

Published in The Daily National Courier, January, 16 2023

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