Question & Answer: sadvantages of organizing a business as a partnership? Compare and contrast g…..

What are the advantages and disadvantages of organizing a business as a partnership?

A partnership is commonly formed where two or more people wish to come to together to form a business. Being a partnership, the business owners necessarily share the profits, the liabilities and the decision making.

Advantages of Partnership

Capital – Due to the nature of the business, the partners will fund the business with start up capital. This means that the more partners there are, the more money they can put into the business, which will allow better flexibility and more potential for growth.

Flexibility – A partnership is generally easier to form, manage and run. They are less strictly regulated than companies

Shared Responsibility – Partners can share the responsibility of the running of the business. This will allow them to make the most of their abilities. Rather than splitting the management and taking an equal share of each business task, they might well split the work according to their skills.

Decision Making – Partners share the decision making and can help each other out when they need to.

Disadvantages of 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.

Agreement – Because the partnership is jointly run, it is necessary that all the partners agree with things that are being done.

Liability – Ordinary Partnerships are subject to unlimited liability, which means that each of the partners shares the liability and financial risks of the business. Which can be off putting for some people.

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.

Profit Sharing – Partners share the profits equally. This can lead to inconsistency where one or more partners aren’t putting a fair share of effort into the running or management of the business, but still reaping the rewards.

Compare and contrast general partnerships and limited partnerships.

A general partnership is the most common type of partnership. It refers to a relationship in which all partners contribute to the day-to-day management of the business. Each partner will have the authority to make business decisions and even legally bind the company in contracts.

The liabilities, contributions, and responsibilities of the partners are often equal unless stated otherwise. Typically, a partnership agreement will describe which partners have certain authorities and responsibilities.

A limited partnership is a relationship where the limited partner may not be involved in the day-to-day management of the business. This partner may have just contributed funds to the business, and often the funds that they contribute are the extent of their liability. Limited partnerships will still have at least one general partner to man the day-to-day operations of the business.

The general partner may also be personally liable for the debts of the company, while the limited partner is not. A general partner’s liability is not limited to their investment. Their personal assets can come into play when it comes to paying off the company’s debts.

A common purpose of a limited partnership is for real estate. There may be several limited partners for the purpose of raising additional funds to purchase the real estate, as long as there is at least one general partner. The benefit of being a limited partner is so your liability is limited, while the downside is that a limited partner will not have the decision-making powers that a general partner would.

There have been cases where a limited partner has given up his limited liability status by being too involved in the organizations management. Often clients will work with an attorney to ensure their limited liability is protected as a limited partner. For clients who wish for all members to have limited liability protection, the popular choice is the LLC.

Under what circumstances might you set up a partnership?

Consider a partnership if the number of people involved is small (up to about 20) and limited liability is not necessary.