Whenever you start a business, you will have to choose one of the different business structures such as sole trader, partnership, company etc. This choice will generally affect the numbers of owners, registration requirement, tax payment and legal liabilities of the owners.
Previously, we have discussed sole proprietorship as a business structure and today’s article focus on partnership as a business structure.
What is a Partnership?
The US Small Business Administration has defined partnership as a single business where two or more people share ownership. Partners contribute to all aspects of the business, including money, property, labour or skill. In return, each partner shares in the profits and losses of the business.
The operation of partnership business is usually governed by a “Partnership Agreement” or a “Partnership Deed”. The deed may cover issues such as profit sharing, entitlements (salaries and benefits), interest on partners’ capital, procedures on new partner admission, retirement and the dissolution of the business.
Common Types of Partnerships
Generally there are two main types of partnership structure and it is important for the partners to understand the differences between these two before starting the business. The structures are a general partnership and limited partnership.
- A general partnership is very similar to sole proprietorship with two or more partners coming together. However, the partners or general partners are severally and jointly liable for business liabilities and it is unlimited.
- A limited partnership has one or two general partners and one or two limited partners. The general partner usually controls and operates the business and has unlimited liabilities whereas the limited partner is dormant and the liability is limited to their contribution.
In many jurisdictions, there must be at least one general partner and if the partnership deed is silence about the status of the partner, it is deemed that all partners are general partners. It is therefore important to seek the advice of a professional lawyer on the terms of the deed before executing it.
Advantages and Limitations
Compared to other businesses structures, partnerships business could have the following common advantages and limitations:
- Another simple business structure that can be started by two or more partners.
- Few documentations are required to register but it is important you have a written and sealed deed.
- A limited partner may enjoy lower risk compared to a general partner.
- Division of labour could be enjoyed as two better heads are better than one.
- Few legal compliances; compared to the periodic filings and returns by companies.
- General partners have unlimited liabilities – jointly and severally.
- If the key partner leaves, the business can face challenges.
- If the partners dispute, the firm could be dissolved or put to a standstill.
- In most cases, selling of your share of the business would require the consent of other partners. This could slow your exit process.
- Wrong partner – If you start the business with a wrong partner, the relationship will not last long.
Who should be your partner?
Before accepting to start a partnership with someone, do proper research about the person. Not everyone is sincere and committed like you. Professor Noam Wassermann of Harvard Business School has advised that co-founding business with someone you have a social relationship (family, friends) and not a professional relationship can be an unstable team.