Starting a new business on your own can be a very daunting task. You have to deal with a multitude of issues, such as finance, supply chains, labour and compliance; therefore, having extra hands on deck to help out can make all the difference in the world, especially in the stormy early stages of your business.
This is one of the reasons why partnerships are a popular form of business ownership for many entrepreneurs. It is also tried and tested, too, with various incarnations of the partnership model dating back thousands of years. Widely considered as one of the earliest steps in the evolution of commerce and trade, there are several reasons why it is still used today, which we will explore further in this article.
So, if you're unsure whether it's the right structure for you, here are the main advantages and disadvantages of a business partnership.
Advantages of Partnerships
Creating a business partnership is a critical decision that can have massive implications for the future of your enterprise. Therefore, it's vital to understand the pros and cons. Let's start with the positives:
This is one of the strengths that partnerships actually share with sole proprietorships - they are both straightforward to set up. In comparison, limited companies and corporations tend to have many formalities and regulations within most jurisdictions.
You don't need any formal documents to start a partnership. Even a verbal agreement is enough, though a written contract is highly recommended. In most jurisdictions, you are not even required to register your partnership with the business and tax authorities, making it the perfect option for those looking to avoid paperwork.
This is probably the most significant advantage of a partnership: you are not alone at the helm of your business. Having others to help share the load can make day-to-day management less complicated, while it is also much easier to raise finance when there are multiple partners involved.
With increased access to resources, you also have a better chance of creating a more extensive business outright or expanding quickly. In this regard, partnerships undeniably have the edge over sole proprietorships.
In a general partnership agreement, all the partners have equal and unlimited liability in the business. If the company suffers a loss, then it will be absorbed equally among all the partners. This helps soften the blow to your personal finances, which is not possible if you are a single owner.
That shared element of risk also means that partners tend to be more careful and measured when making any decisions. There is a sense of collective responsibility among the partners that might be absent in larger entities like limited companies.
On that note, it’s worth mentioning that, in a partnership, decisions are made through consensus between partners. Therefore, each individual will bring something unique to the table - intelligence, experience, temperament, and of course, judgement - enabling a better decision-making process than if you were on your own.
Besides the quality of the decisions, the speed at which they can be made in crunch situations is another advantage. As a sole owner, you may not always be able to stay on top of every aspect of the business. This is less of a problem in partnerships as you can divide the duties and responsibilities. When a situation arises, someone will always be on hand to make quick – and, more importantly – good decisions.
Better Agility & Flexibility
With more leaders in your organisation, it is often easier to spot newer opportunities that you might have otherwise missed. Due to the division of labour, you can get more work done and pursue avenues you might otherwise have been forced to abandon.
Partnerships are also very easy to modify and evolve due to the mostly non-existent regulations and compliance. As long as you have a consensus, you can change the various aspects of the business as and when you desire.
Ending a partnership is easier than starting one, too, with no significant legal formalities involved. It can be freely terminated on the death, insolvency, or lunacy of any of the partners. In the absence of that condition, you may even terminate it on your own discretion by giving notice to the others.
Disadvantages of Partnerships
While there are many advantages to partnerships, they also suffer from some inherent flaws. In some instances, these might be critical enough to dissuade you from pursuing them as your preferred model of ownership, so it's important to bear them in mind.
Dilution of Control
When you bring in other people into the ownership structure of your enterprise, you lose the freedom that you had as a single owner. If you value total liberty in strategy, vision and decision-making, then a partnership might not be the best option for your business.
Potential for Conflict
Conflict is often the single biggest flaw that sinks many partnerships in the market, with Business Insider claiming that as much as 80% fail for this reason. This is why you have to be very careful in choosing your business partners; even if they are honest, capable and motivated individuals, differences of opinion and arguments can still arise, negating all the advantages of having those extra pairs of hands.
Increased Risk & Liability
Your risk is only reduced in a partnership if you have skilled and competent partners. If the opposite is true, and you have lazy or irresponsible partners in the company, the quantum of risk borne by other partners can increase.
Then there is the issue of persistent liability. Even if you withdraw from the partnership, you can still be held liable for past actions done under your capacity as a partner in the business. It's worth noting that this does not happen in limited companies, where you forego all and any liability once your shares are sold.
Unsuitable for Expansion
While they offer more resources than sole proprietorships, partnerships do not scale well with the expansion of your business. If you want to bring in more capital, you may have to bring in more partners, which can make the day to day running of the business incredibly complicated.
Due to unlimited liability, partnerships have to be more cautious than limited companies when pursuing expansion opportunities. In reality, they are only suitable for small and medium-sized enterprises that are not aiming for rapid growth.
Fragility & Instability
Partnerships are among the least durable forms of business organisation - the flip side of having such a simple structure. There is always the risk of an abrupt end to the partnership through death or other extenuating circumstances, while things can also end messily if conflicts prompt a partner to withdraw from the business unilaterally.
If you are an aspiring entrepreneur with a small business idea, a partnership is one of the best options out there, especially if you need extra resources and cash. However, they do possess several crucial weaknesses that make them less attractive for startups aiming for rapid expansion; in such instances, it might be worth considering the formation of a limited company.
What do you think? Are partnerships outdated, or are they still the best option for small startups? Let us know in the comments below.