Choosing the right legal structure can be a difficult process for a budding entrepreneur.
There are many structures to choose from and some are better than others depending on the needs and aspirations of the business owners.
Business structures impact the level of liability, how a business is taxed and the ability to attract investment.
Previously, we have discussed the key features of being a sole trader, including its advantages and disadvantages.
Today’s blog will be concentrating on a partnership agreement.
Partnership
A partnership entails two or more individuals joining forces to create a successful enterprise.
Both you and your partner(s) personally share responsibility for the business.
Partners share the profits and each partner pays tax on their individual share.
A partner does not need to be an actual person, they could in fact be a limited company. A limited company counts as a ‘legal person’.
If you set up a business partnership you must:
- Choose a business name
- Choose a ‘nominated partner’
- Register with the HM Revenue & Customs (HMRC)
A ‘nominated partner’ is responsible for managing the partnership’s record-keeping and tax returns.
A partnership agreement document details who owns what portion of the business, the liabilities, how the profits of the business are split, the assignment of duties and what happens if one partner wants to leave.
Each partner must register as self-employed and file a separate tax return.
In a conventional partnership, all partners bear full responsibility for all debts owed by the business.
Advantages of a partnership
- Easy to set up – A partnership is generally easier to form, manage and run a business.
- Better access to funding – As a partnership, you will have stronger borrowing capacity, when compared to a sole trader.
- Shared responsibility – Partners can divide tasks and decision-making, allowing everyone to focus on their specific strengths and expertise, leading to increased efficiency and productivity.
- Flexibility – Compared to corporations, partnerships offer a more flexible management structure. Partners can make decisions and adapt to changing circumstances more quickly, as there is less bureaucracy to navigate.
Disadvantages of a partnership
- Potential for conflict – When multiple partners are involved in decision-making, disagreements can arise. The conflicts could lead to tension and reduced productivity if not effectively managed.
- Limited lifespan – Partnerships can be dependent on the continued involvement of each partner. If one partner leaves or passes away, the partnership could dissolve and the remaining partners may need to restructure the business or form a new partnership.
- Unlimited liability – Each partner faces unlimited liability and is each responsible for the debts and obligations of the business, meaning personal assets could be at risk in the event of financial difficulties.
- Points of congestion – While partnerships can provide increased flexibility in decision-making, they can also lead to delayed agreements when consensus is required. This can slow down progress, especially when partners have different priorities or visions for the business.
A partnership can be an attractive option as the business structure offers numerous advantages, such as shared responsibility and increased chances of funding.
However, it is important to consider both the pros and cons of starting a partnership.
Need any advice navigating your finances as a partnership? Get in touch today.