Advantages and Disadvantages of Partnership business: A partnership business is frequently formed when two or more people want to form a business together. Perhaps they have a common business idea they want to test, or they’ve realized that their skills and talents complement each other in such a way that they’d make a fantastic business partnership. Forming a partnership appears to be the most natural choice, and it is in some situations.
A partnership is generally a desirable choice of legal form for a new firm if it is a small business with a low turnover. The way a partnership is organized and administered, as well as how it is controlled and taxed, makes it one of the most desirable company structures. However, there are times when this is not the case.
Because the business is a partnership, the earnings, obligations, and decision-making must all be shared. This is one of the benefits of forming a partnership, especially when the parties have complementary skills and can collaborate effectively. However, it can cause certain issues. Many partnerships have deteriorated over time. Family and friends form bonds only to fall out on a personal level, resulting in a disastrous outcome., but it is critical to carefully examine the benefits and drawbacks. The advantages and disadvantages of partnership are discussed below.
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Table of Content
Advantages (Merits) of Partnership Business
1. Easy to get started: The formation of a partnership business is simple. It has fewer legal requirements and is less expensive. The formation of a partnership business does not necessitate the registration of the firm. Only the partners should be able to agree.
Even though it will take longer and cost more, establishing a partnership agreement is usually a good idea. This contract outlines how the partnership will operate, as well as the partners’ rights and obligations, as well as what would happen in a variety of scenarios, such as if the partners fundamentally disagree or one of them wishes to quit.
2. Less formal with fewer legal obligations: One of the main advantages of operating a partnership business over limited companies is the lack of formalities. Accounting for partnerships is usually simpler than accounting for limited companies. Your partnership firm will not be required to submit a Corporate Income tax Return, but you will need to keep track of your revenue and expenditure.
You won’t have to fill out a confirmation statement, and you’ll have a lot more possibilities than with a restricted business. A partnership will never be required to file any of the same documentation that a limited company would be required to file. In addition, there are fewer records to keep track of.
3. Flexibility: A partnership firm has fewer legal requirements and is not subject to government regulation. As a result, the partners can make changes to the company based on their preferences.
They can change the size of the capital, the size of the business, and the management structure without having to go through any additional legal hoops. When necessary, the partners can make solid judgments based on changes in the external environment.
4. Risk Sharing: A partnership firm is frequently made up of a large number of people. Because the members agree to split earnings and losses equally, the risk is shared by all.
As a result, the risk burden on each partner is significantly reduced when compared to a sole proprietorship. Because the partners have less work to do, they are more driven to take on riskier ventures with bigger profit margins.
5. Privacy: A partnership firm is not required to disclose its accounts. As a result, what happens in the business stays in the business.
Furthermore, because the partners are the ones who make the important business choices, there is no risk of trade secrets being leaked, and the firm’s anonymity is maintained.
6. Division of work: All of the firm’s work is shared among the partners depending on their knowledge and talents in partnership.
In a partnership, division of labor is feasible. This division of labor leads to more efficient management and more revenues.
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7. More expansion Scope: A partnership’s scope is broader than that of a sole proprietorship. In a partnership firm, the partners have more flexibility in arranging finances from their resources and borrowings.
The partners are also excellent managers. Their organizing skills are also put to good use in terms of growth and efficiency.
8. Easier Dissolution: A legal procedure is not required for the dissolution of a partnership. The firm might be dissolved due to insolvency, madness, or the death of a partner. As a result, dissolving a partnership is simple and inexpensive.
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Disadvantages (Demerits) of Partnership Business
1. Unlimited Liability: The partners in a partnership business agree to split all losses and earnings equally. Even though the debts are not theirs, the partners have the right to assume responsibility for all of them.
Each partner’s obligation is unrestricted. This places a strain on the partners’ personal belongings and income.
2. Blocking of capital: A partner who intends to withdraw their wealth from the firm cannot do it on their own. Withdrawal is only possible if all of the other partners agree. The partners are also prohibited from selling their shares to a third party.
If someone wants to do so, they must first obtain the permission of the other partners. As a result, they lose their investment liquidity. This is one of the main reasons why people are hesitant to invest in a partnership.
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3. Uncertainty: In a partnership business, there is a lot of uncertainty. Insanity, insolvency, retirement, and the death of a partner can all lead to the business’s abrupt closure.
Aside from the reasons listed above, a partner can also notify the other partners of the business’s dissolution. As a result of all of these instabilities, long-term planning and new company concepts have grown more challenging.
4. Difficulty in decision-making: Before choosing a partnership business, all partners must agree. From trivial to significant decisions, all partners must agree.
All partners’ acceptance is also required while making policy decisions. As a consequence, the partners are often unable to make fast or instinctive judgments about the firm.
5. Mutual Difference: Every partner in a partnership firm is aware of the firm’s facts, records, and secrets. If there is a mutual conflict among the partners, there is a good probability that confidential information about the company may be leaked. The partners may reveal their firm’s secrets to other competitors.
6. Perceived lack of prestige: The partnership business model, like that of a sole trader, frequently lacks the aura of prestige associated with a limited corporation.
Partnerships may appear to be ephemeral firms due to an absence of autonomous life outside of the partners, however, many partnerships are in reality quite long-lasting. This look of impermanence, along with the fact that the partnership’s financials cannot be independently confirmed at Companies House, can give the impression that the partnership is riskier.
7. Profits must be shared: A solo trader maintains all of their business gains, but the profits of a partnership are shared among the members. By default, profits are divided equally. Although, through a cooperation agreement, this can be modified.
Equitable profit-sharing could lead to a slew of issues. How would you rate your various partners’ abilities? What if one of the partners looks to be putting in less time and effort while still obtaining a profit share? Resentment is easy to grow if there does not appear to be a fair balance between labor and reward.
8. The business has no independent legal status: The participants in a business partnership do not have a separate legal existence. When one of the partners resigns or dies, the partnership will be dissolved by default unless a partnership agreement providing alternative provisions is in place.
This strategy may cause uncertainty and instability, divert attention away from company progress, and is often not the parties’ intended outcome. Because if there is a partnership agreement in place, the parties involved may not be able to purchase the exiting partner’s portion of the company. The company will almost definitely have to be disbanded in that situation.
After considering some of the benefits and drawbacks of a partnership, you may conclude that the benefits outweigh the drawbacks. Furthermore, with due diligence, appropriate inquiry, and a detailed, signed a business prenup, some of the downsides of a partnership may be overcome.
Finally, ensure that you are at ease in a partner role. Consider what growth goals a partnership can assist you to attain that you wouldn’t be able to achieve on yourself alone. What kind of knowledge can you find in a partner that could be a competitive advantage?
In light of your financial situation and perspective, weigh all of the benefits and downsides of forming a partnership. Spend time assessing your possible companion above everything else to ensure that you are a good fit. A business partnership resembles a marriage in many ways. And, as with any long-term relationship, it all begins with finding the right person, someone you can rely on.
Edeh Samuel Chukwuemeka ACMC, is a Law Student and a Certified Mediator/Conciliator in Nigeria. He is also a Developer with knowledge in HTML, CSS, JS, PHP and React Native. Samuel is bent on changing the legal profession by building Web and Mobile Apps that will make legal research a lot easier.