Advantages & Disadvantages of Partnership
The partnership has lots to offer when people enter into a partnership business. There are several drawbacks too.
One of the most common forms of running a business in the U.K is entering into a partnership business. It is a partnership where two or more people unite together to form a business. Undoubtedly, they do have a common business idea which they
want to implement together or have realized that they can put their skills and talents to use in such a way that makes a good business team.
It is a logical option to form a partnership. Running a small business as a sole trader or a limited company on a reasonably low turnover doesn’t make any sense than to engage oneself in a partnership business which offers a good choice of legal structure of a new business. The partnership
is the most lucrative form of business provided the way partners’ set-up and run in a manner that it is governed and taxed which perhaps isn’t the case.
Looking at its positivity, the partners in a business are the business owners who share the profits, the liabilities and the decision making abilities. Each of the partners has a different skill set which can be combined together for a smooth running
of the business. No doubt, it presents some problems too. Like over the years, most of the partnerships have ended up drastically. Family and friends join together in one business and end up coming out on a personal or a business level
which leads to a failure in business. This is one of the major drawbacks of partnerships over other business models like a sole trader or a limited company, but it’s very much important to maintain a fine balance between the advantages
Lack of formality with some legal obligations
01 Lack of formality is one of the main benefits of a partnership when it comes to managing a limited company. Besides the partnership requires the following:
- The accounting process in partnerships is easier as compared to limited companies.
- There is no requirement to complete a Corporation Tax Return.
- You need to maintain a record of income and expenses.
- Every partner is required to submit their partnership returns to HMRC.
- Every partner individually needs to file their own self-assessment return comprising of the details of their profits
from the partnership (along with other income).
- Partnership firms don’t need to complete a confirmation statement and
don’t need to submit other Companies House forms as required in limited companies.
- Fewer records need to be maintained but don’t require to maintain a set of statutory books as in case of limited companies.
- Partnership is easier to dissolve. That means each partner has the full flexibility to leave when ever they wish to.
Easy to start
- Partnership can easily be created by the partners in verbal or in writing.
- Registering the partnership for taxation with HMRC is quite simple. However, a partnership is not required to get registered with the
- It is easier for the partners to individually register for self-assessment online.
- Partnership is a long process and incurs an extra cost, it is quite reasonable to assemble in a partnership agreement.
- Partnership agreement keeps a record of how the partnership will work, duties and responsibilities of partners and what would happen in several instances where the partners principally disapprove or someone wants to quit.
Sharing of responsibilities is easier
03 A Partnership is much better than running a business as a sole trader as:
- Companionship and mutual support are the main benefits of working in a partnership.
- The partners are allowed to make the most of their abilities by dividing their work according to their skills rather than dividing the management and taking shares.
- One partner can undertake bookkeeping task if he/she is good in math while other who has a flair in sales can undertake
the sales business.
Accessibility to knowledge, skills, experience and contacts
- Partnership has the easy accessibility of knowledge, skills, experience, and contacts each partner brings.
- Every partner oversees the task as per their proficiency. For example: one who is good in analytical skills would like to supervise bookkeeping and other who is having an extensive experience in sales would like to supervise the sales of the business.
Effective decision making
- Having partners in a business mean putting more brains which brings out a unique perspective involving a business problem or picking a business idea which can be effectively implemented.
- Two heads are far much better in partnership than one in reaching out a combined conclusion of debating a situation instead of what each of the partners could have achieved individually.
Privacy is maintained
- The confidentiality is maintained in a partnership as compared to the limited companies where in certain documents are kept for availability for public inspection at the Companies House.
- In limited companies, the shareholders of the company inspect the registers and other documents the company is required to maintain.
Offers a mixed combination of Ownership and Control
- In partnership, the partners owns and controls their business.
- It is the partners who agree on how to operate and accelerate the partnership business.
- The partners are free to perform without any intervention from any shareholders. This can make apartnership more flexible with the ability to adapt to any changing circumstances more quickly.
More partners mean more money is invested in the business
- More partners bring more money into their business with their joint efforts that can drive growth.
- More partners in business increase the borrowing capacity for the business.
- It is possible to bring a new partner into a general partnership.
- Good staff may have the possibility to join the business as a partner either today or at some point in the future.
Easy accessibility to profits
10 As the business profits
are shared between the partners in a partnership, it can directly flow through the personal tax returns of the partners
instead of initially being retained within the partnership.
Disadvantages of Partnership
Apart from lots of advantages partnership business offers, there are several drawbacks too. Let’s check each of them in detail:
Business has no independent legal status
- In partnership, there is no definite independent legal existence of partners.
- Unless there are no alternative provisions specified in partnership, it will be dissolved upon the resignation or death of one of the partners. This likelihood can cause insecurity and instability which can deviate attention from developing
the business and will not be the chosen outcome of the remaining partners.
- If the partnership agreement is in place, the remaining partners are not in a condition to buy the outgoing partner’s business shares. In such a case, the business will possibly still need to be dissolved.
- As the partners don’t have a separate legal personality, they are personally accountable for any debts or losses incurred.
- In case of any business trouble, the personal assets of the partners may be at the risk of being seized by creditors which is not the case of a limited company business.
- The partners are jointly and severally accountable. If one partner is unable to settle the debts,then other partners may be responsible for doing so. For example: if you own 10% of the partnership assets and in case if other partners
don’t own any assets, eventually you have to settle 100% of the partnership debts by selling your assets.
Perceived lack of reputation
- The partnership lacks the sense of reputation which is more related to a limited company. As there is alack of independent existence among partners, partnerships can look to be a temporary enterprise,whilst most of the partnerships
are very long-lasting.
- Due to the existence of impermanence, and the partnership’s financials cannot be independently checked at the CompaniesHouse,
can prove to be riskier. Due to such reason, some clients in particular industries will consider dealing with a limited company and even refuse to do the transaction with a partnership business.
Limited capital accessibility
- It is difficult to raise money from banks in partnership business as the banks consider greater transparency, distinct legal personality and sense of continuity which proves to be riskier.
- Banks are also unwilling to lend money due to the above-mentioned reasons or will only do so on less generous terms and conditions.
- Even the partnership business cannot have access to other forms of long-term sources of finance.Also,the business cannot issue securities or other shares in exchange for investment.
The likelihood for differences and conflict is higher
- The partners lose autonomy in a general partnership business where you won’t be able to go always on your own way and every partner will express their flexibility and ability to compromise.
- The potential differences whether large or small will be there among partners that can arise while:
- Making strategic decisions regarding directing the course of business.
- Making decisions regarding handling number of discrete business.
- Handling different perspectives on allocating the rewards among partners for putting their time,skills and level of investment into the business.
- Handling ambitious pursuits of some partners who want to take every decision of growing and developing the business, while others want to stay quiet.
- Differences might not be noticeable immediately. With the passage of time, preferences of partners,personal situations and expectations may change and it should be attuned from the start otherwise differences among partners
may appear later on.
Decision making becomes slow and often takes much of time
- Every decision is made among consultation between the partners. Upon any disagreement, much of time is spent in negotiating to build the common agreement.
- By seeking consultation among each and every partner may lose out the opportunity which could have been used for making business decisions and this will frustrate the partners.
- Since profits are shared equally as per the Partnerships Act 1890, this may raise difficult questions like:
- On what basis do you weight one partner’s respective skills?
- What happens when one partner is investing less time and effort in partnership business but taking an equal share of profits?
08 These questions, however, creates
resentment among-st partners and doesn’t permit each partner to get their fair balance between effort and reward. In a partnership business, each partner has to share the stress and workload which in turn consumes a lot of time and energy
and hampers your work/life balance, especially when you cover up another partner who doesn’t have a strong work ethic.
- Less tax planning opportunities are available in the partnership business.
- The partners are subject to the income tax in the financial year in which they get their share of profits as income.
- Profits can’t be retained as income to be drawn in a later year when the income of a partner stands to be lower.
- The tax efficiency of a partnership business depends on your personal circumstances. You need to consult a tax professional for getting an advice based on your personal situations.
Limits on business development
- There is a restriction on the growth of most partnerships when it comes to expansion.
- Due to the combination of unlimited liability, lack of funding opportunities and a lack of commercial status obstructs the growth of a partnership business.
- The lack of legal personality in partnership obstructs the business to own a property, enter into contracts or borrow from different sources makes it difficult to grow.
- It is difficult for any partner to exit the business and profit at an earlier date may destroy the business. While exit strategies of one or more partners can seem to be easily managed in a limited company structure by selling their shares
of the partnership business.