Most businesses start as sole proprietorships. However, once they face limitations, such as capital or expertise limitations, they may convert into partnerships. Partnerships are one of the oldest business structures. They have several advantages and disadvantages. However, it is crucial to understand what these are first.
What are Partnerships?
Partnerships are businesses where two or more owners combine their resources to operate. These owners may come together for a specific, shared purpose. Usually, they combine their assets, expertise, and skills to benefit from the business mutually. Partnerships have evolved significantly from the past. Now, there are various types of structures within this business structure as well.
Most partnerships operate through a partnership agreement or contract. This contract specifies various aspects of the business. It also mentions each partner and how much capital they invested in the partnership. When a partner joins or leaves the business, the partnership agreement gets renewed to include new terms.
What are the advantages of Partnerships?
Partnerships have many advantages for the owners compared to other business structures. These include the following.
More capital
Since partnerships involve more than one individual, these businesses don't have to suffer capital limitations. They can get funds from all involved partners. In case the existing partners cannot pay for additional finance, the business structure allows the inclusion of new partners. This way, partnerships don't run out of capital.
Increased expertise and accountability
Usually, each partner brings some expertise to a partnership. It allows partnerships to benefit from their skills and knowledge to grow the business. Similarly, each partner is responsible for a specific part of the business, which allows for better control and accountability.
Fewer legal obligations
While partnerships have more legal obligations compared to sole proprietorships, they are still lower than corporations. Therefore, there is lesser administration involved in these businesses, which also results in lesser paperwork. Similar, partnerships don't have to abide by strict market regulations, which is not true for some corporations.
Better decision-making
Partnerships allow partners from different backgrounds to come together. As mentioned, each partner brings expertise to the business. It further allows for better decision-making. Since each partner can contribute and increase the decision-making quality, partnerships are better than sole proprietorships.
What are the disadvantages of partnerships?
Partnerships also have some disadvantages, which include the following.
More disputes
Not every partner in a partnership will agree to the course of the business it takes. Therefore, it may create more disputes among the partners. These can even result in slower business processes and decision-making. It also creates a “blame game” culture within the business.
Lower profits
Partnerships involved sharing profits between partners. Therefore, it results in lower income for each partner than if they were in a sole proprietorship. The profit-sharing ratio is a part of the partnership agreement. Sometimes, partners may also disagree with their share of the profits, which can create further disputes.
Unlimited liability
Most partnerships come with unlimited liability for the partners. In case the business dissolves or legal disputes, they have to repay debts from their personal assets. Although each partner's liability is limited to their profit-sharing percentage, they still have to pay more than they have invested in the business.
Conclusion
Partnerships are business structures where two or more individuals form a business. Usually, there is a partnerships agreement that defines the terms of the partnership between both partners. Partnerships have various advantages for the partners involved but may also come with some disadvantages.
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