A partnership seems like the best option when you have a wonderful business idea but not enough resources to actually implement that idea. Partnerships are usually formed when two or more people decide to contribute to the success of one business. It is crucial for all the partners of a business to have the same goal to ensure success. Their talents should complement each other such that they can form a good business team.
A partnership is a good business option in many cases, but not in all. It has its own advantages and disadvantages, and it is important to know them before deciding to form a business partnership.
Positive Impacts Of Partnership
A partnership is a good business choice for many reasons. It helps you find the necessary skills and/or resources without having to pay for it. It also improves your business’s decision-making process and helps you make better decisions. Below are some of the most noticeable benefits of a business partnership.
More partners simply mean more money and resources for business. Capital is one of the basic reasons why many businesses choose to go for a partnership. If you can grow sufficient resources within partners, you won’t have to take a business loan or any other credit in the name of the business. And even if you do, partnership increases your borrowing capacity.
Better Decision Making:
Partnerships increase your decision making capability as there are more people to discuss with before a decision is made. A partnership usually involves people with different skills, knowledge and experience level, who can all contribute to come up with the best decision in any type of situation.
New partners bring new contacts and new potential customers to your business. When two or more people come together to start a business, it is normal for them to use their existing contacts for the growth of the common business.
Among all other things, responsibilities are also shared between the partners of a business. This allows them to make most of their time and abilities. This way, all business responsibilities and burden do not fall on a single person, and everyone can work best according to their skills.
Partnership based businesses are usually not required to pay taxes, as each partner mentions in his own personal tax return the profits and losses of his business. So, there is no separate taxation for the business.
Easy to form and change:
Business partnerships are easy to form as there are no special laws for them, and these can be started with minimal paperwork. It is also easy to change the rules and terms of partnership in the future. Or if one of the partners decides to leave, it can also be arranged easily.
Negative Impacts of Partnership
Not all business partnerships end well. Sometimes, a partnership formed for the good of business may end up destroying much more. Below are explained some of the most common disadvantages of business partnerships.
Profits of the business are supposed to be shared equally among all partners. This may cause an issue when one or more partners are either not contributing or assumed to be not contributing their share of efforts and/or time.
It is common to have a difference of opinions or even different views of different partners, but this creates a major issue when there arises a disagreement between partners. No matter the origin or cause of disagreement, it is known to have destroyed several business partnerships and can do the same for yours. It not only harms the business but also your personal relationship with that person.
A partnership business is treated as one entity for all business transactions, irrespective of the number of partners. All partners of the business are liable for any actions, debts, transactions, and everything else within the business capabilities.
The Risk of Dissolution:
You can never be sure when one of your partners decides to leave the business or to end the partnership for any reason. This dissolution of business effectively ends the business partnership forcing you to value the business assets and divide them accordingly.
Freedom of Choice:
With a partnership business, you cannot make a company decision by yourself. Each business decision is supposed to be made by consulting all partners. You are still free to share your ideas but you cannot make a managerial decision unless all partners agree to it.
One of the most significant disadvantages of business partnerships is that the decisions are made by the business partners or the company board and those decisions are usually final which everyone is required to accept whether they like it or not. This even applies to the actual owner or founder/s of the company.
A partnership business is usually not liable to tax but individuals partners are supposed to pay business taxes on their own. This may sometimes increase the overall tax amount paid by the partnered entity.