Consider a partnership if the number of people involved is small (up to about 20) and limited liability is not necessary.
Advantages of a partnership include that:
- two heads (or more) are better than one
- your business is easy to establish and start-up costs are low
- more capital is available for the business
- you’ll have greater borrowing capacity
- high-calibre employees can be made partners
- there is opportunity for income splitting, an advantage of particular importance due to resultant tax savings
- partners’ business affairs are private
- there is limited external regulation
- it’s easy to change your legal structure later if circumstances change.
Disadvantages of a partnership include that:
- the liability of the partners for the debts of the business is unlimited
- each partner is ‘jointly and severally’ liable for the partnership’s debts; that is, each partner is liable for their share of the partnership debts as well as being liable for all the debts
- there is a risk of disagreements and friction among partners and management
- each partner is an agent of the partnership and is liable for actions by other partners
- if partners join or leave, you will probably have to value all the partnership assets and this can be costly.
Partnership firms have both advantages and disadvantages. While they offer shared responsibilities, shared capital, flexibility, and tax benefits, they also have unlimited liability, no separate legal entity, limited capital, and a limited life.
Before starting a partnership, it is essential to carefully consider these factors and create a partnership agreement that outlines the roles, responsibilities, and obligations of each partner