Partnerships are legally defined entities where at least two individuals share a business. All individuals share in the liability, management and profits of the business. The most common partnership is a general partnership, where all individuals share unlimited liability. Because of the unlimited liability in a general partnership, usually all partners will be active in the management of the business. Another type of partnership is a limited partnership. In a limited partnership at least one partner has limited liability for the debts of the business. Usually this is the general partner. The other partners will act as investors, and will have no jurisdiction in the daily operations of the business.
Advantages of a Partnership
Setting up and maintaining a general partnership is fairly simple, as it is similar to a sole proprietorship. There is little paperwork to complete, in comparison to a more complex corporate structure. A partnership can be considered better than a sole proprietorship because the owners can rely on the backing of at least two individuals instead of a single person. These individuals can approach the financial backing, management and operations of the business as a team. This also allows for easier acquisition of outside investors and supporters.
Disadvantages of a Partnership
General partnerships still have unlimited liability, similarly to sole proprietorship. Therefore the personal assets of the partners are at risk. In addition, the profits of the business are shared between multiple individuals instead of a single individual. This means the profit for an owner would be less than if they had a sole proprietorship structure. In addition, partners may have issues with coming to an agreement on the operations or management of the business. This may cause conflict that will not be good for the overall health of the business.
Partnerships are a viable type of business structure for individuals who are would like to combine their talents with the talents and resources of others. Understanding that there are types of partnerships that dictate the business liability of the owners is extremely important, as is being aware of the key advantages and disadvantages.