What is a Partnership?
A partnership is a business structure that involves a formal arrangement between two or more parties to conduct business. All parties involved in this structure enter into a partnership agreement to share profits earned through it. This arrangement allows several parties to combine their capital and expertise to manage and operate a business.
Partnerships are different from other business structures such as sole proprietorships or companies. Compared to sole proprietorships, partnerships allow for more than one owner. However, partnerships aren’t as complex as companies. Usually, partnerships aren’t separate legal entities, which means that the owners don’t have limited liability.
What are the types of Partnerships?
There are different types of partnerships that allow partners to combine their capital to carry out their business. Usually, there are three types of partnership structures that are prevalent in various jurisdictions. These include general partnership, limited partnerships and limited liability partnerships.
A general partnership is a partnership structure that consists of partners who participate in the partnership’s operations. In a general partnership, the owners have unlimited liability for the partnership’s obligations. General partnerships are prevalent for sole proprietorships converting to partnerships or startup partnership structures.
A limited partnership is a partnership structure with one or more general partners and at least one limited partner. The general partners take operational decisions in the business and carry unlimited liability. On the other hand, the limited partners only invest in the partnership but do not have any personal liability for its obligations.
A limited liability partnership is a type of partnership structure that limits the liabilities for partners. The partnership is a separate legal entity from the involved partners. However, partners will carry some liability for the partnership’s actions in most cases. Limited liability partnerships are similar to companies. However, each partner in a limited liability partnership bears some obligation for their actions or debts.
What are the advantages of Partnerships?
Partnerships are a step up from the basic sole proprietorship structure. Due to this, it has many advantages for business owners, including the following.
- Through partnerships, partners can combine their knowledge and expertise to achieve synergies.
- Partnerships provide a structure for more capital injection into the business.
- In partnerships, partners can divide their responsibilities and operational burdens.
- Partnerships provide owners with more business opportunities.
- Partnerships come with some tax benefits, including tax exemptions and deductions.
- In a partnership, the existing partners can alter the partnership agreement to introduce more partners.
What are the disadvantages of Partnerships?
Despite the advantages, partnerships can also have several disadvantages. These include the following.
- Partnerships do not constitute a separate legal entity, thus, increasing the partners’ liabilities.
- Due to the business structure, partnerships can create many conflicts between partners.
- Despite the increase in capital opportunities, partnerships are still limited compared to companies.
- Partnerships can result in slow and complicated decision-making and administrative processes.
- Each time a partner joins or leaves, the partnership agreement must be renewed.
A partnership is a business structure in which two or more parties combine their resources to operate and manage a business. There are various types of partnerships, including general, limited and limited liability partnerships. Partnerships are more advantageous compared to sole proprietorships. However, they still lag behind companies.