Starting your business in partnership cannot be just thought in terms of set-up costs, legal formalities, and tax effectiveness. Partnerships offer many benefits, like sharing the responsibilities of running the business. But partnerships can quickly go bad and break, if you do not have the right plans for your business structure. This is one basic rule for a business partnership. There should be proper planning, consideration, and forethought to make it a success. This type of a co-owned business arrangement is quite simple and inexpensive, as businesses with several owners tend to survive longer than a sole proprietorship.
Meaning of Partnership
A business partnership involves two or more people in which each partner contributes money, skills, labor, and whatever else is required for the successful running of it. The profit or loss, if any, is also shared amongst the partners. To make things simpler, a partnership deed is drawn before commencing, as it specifies the decisions concerning the running of the business, profit sharing, how to buy or bring in new partners, and how to dissolve the partnership if the need arises.
In a partnership, the equity can be equal - or different - between partners, so the profit and loss are shared based on that. However, if there are any debts, all the partners are jointly liable for them. A business partnership is not like a company, but like a sole tradership where the individual is not a separate entity. Each partner should be responsible for their role in the working of the business as your designation is not that of an employee.
Partnerships are of three types:
General Partnership is one where management responsibilities, profits, and liabilities are clearly listed out in the agreement, and equally divided amongst the partners.
Limited Partnership is better suited for short durations. This type of partnership is more involved, in which the liability and input of each partner relate to the percentage of their respective investments.
Joint Venture is often a short-term partnership, generally lasting for a single project.
Pros of Business Partnership
Below are discussed some of the pros and cons of starting a business in partnership:
Low Capital: Compared to a sole proprietorship which requires a large amount of money, a partnership has considerably lower costs. It is free to register your company for an ABN. Registering a business name is quite reasonable too; $35 for a year and $82 for three years. The partnership also stands to gain benefits due to the pooling of several partners’ resources. One benefit is that more money initially invested in a company leads to greater growth, and expansion in the future.
Easy and Flexible Working: Partnerships are inherently flexible when it comes to working. They are easier to start, and even simpler to operate and manage. When it comes to daily operations, decisions are made easily as two or three partners can arrive at an agreement as compared to a public company. Partnership laws and regulations are also easily mendable and flexible.
Decision Making: Running a business is not an easy task, as there are continuous highs and lows involved. If there is another partner involved, it makes the journey enjoyable and less lonely. It helps in making better decisions, especially in the initial stages. Several heads working together may come up with great ideas on how the business should run, which one person might not be able to think of. And when people set up their own business they move out of a shared workspace, so working in a partnership improves the social side of you.
Sharing Responsibility: No one person possesses the skills required to run a business. One needs expertise in administration, sales, marketing, budgeting, accounting, HR, IT, and legal advice to run a business. When you are in partnership, you have partners with the necessary skills who can share your responsibilities. They might share equally or delegate tasks according to their skills, doing what they are best at. Several partners can give creative ideas, offering different perspectives when it comes to running a business.
Cons of Business Partnership
Absolute Liability: A business partnership has absolute liability as compared to a company, where an individual is an independent entity. In case of an issue like being taken to court by a customer, your personal assets are not at risk. In the same way, if one of the partners is at fault, the responsibility lies with all the partners instead of just one.
Autonomous Decisions: The objectives and goals of all the partners are taken into account in a business partnership. Although opinions differ, it is better to be open about your personal business aims before entering into a partnership project. You may differ in your vision of expanding the business.
Rewards or Reinvestment: Money is one issue where all people differ. In a business partnership, you autonomously agree to share profits and losses. But at times, you need to reinvest the profits for the growth of your business, especially in the initial period. In contrast, it is possible that one partner may want to get their share of rewards at the end of every financial year rather than reinvesting the money back into the business.
Taxation: Taxes have to be paid by each of the partners from their earnings every year. If the business makes a good profit in a particular year, the level of taxation also increases likewise.
Disagreements: Disagreements and conflicts can arise between the partners due to any issues. Sometimes, these conflicts could be because of important matters, while at other times even small things can lead to disagreements. This can result in damaging the reputation and integrity of the company, and personal friendships. To deal with this problem, a course of conflict resolution can come in handy.
Limited Lifespan: Though this not always is the case, sometimes partnerships have a limited lifespan until one of the partners withdraws or passes away.
Transfer or Termination of Partnerships
Termination of partnerships is often associated with horror stories. After years of working together, when things turn bad it can take years before one partner can collect cash or other resources to buy the other out. Usually, a break in business partnership can have an adverse effect on your relationship, along with having conflicting issues when it comes to managing your business on your own.
When your partnership turns sour, you need to introspect and find answers to certain questions, like why do you want to work in partnership? Is it because you lack the confidence and skill? Do you feel secure that you have a partner who will share the financial risk with you? But if you feel the answer to these questions is affirmative, you can always find ways to deal with such issues. If you feel you lack skills, you can have a board of human resources to help you expand your business. If the issue is financial, it is advisable to get financial resources in the form of a business loan.
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If you decide to go for a business partnership, make sure you have a clear partnership deed in writing. Make sure this is done legally before you start your business. This is a decision that should not be made emotionally between friends, but should be a carefully planned out and drafted document. A partnership agreement defines the rights and responsibilities of each partner, along with defining the tasks for running the business. It includes provisions in case a partner dies, or the partnership dissolves. This is mandatory before you invest your time and money in a joint venture.
Do you think this article on business partnership has helped you? Are there any tips you would like to share with other businesspeople? Go ahead and share a few words of advice in the comments section.