When making the decision to start your own business, there are many factors to consider. One of the first choices that you will face is the business type. Whether you become a sole trader, create a limited company or go into partnership with another person, there are advantages and disadvantages to each option.
Whilst you’re likely to come across many articles and how-to-guides focused on sole trading and limited companies, partnership businesses are often overlooked. With this mind, what actually is a partnership business and is it right for you?
What is a Partnership Business?
A partnership business involves a formal agreement between two or more parties, in which each partner shares profits and liabilities equally. This is known as a general partnership business but there is another type, known as limited liability. Limited Liability Partnerships protect one party from the actions of another. For example, if one partner is sued for malpractice, this doesn’t affect the other. This type of partnership is often favoured by those in professions such as architecture, accountancy and law.
You may wonder why some people choose to start a partnership business, instead of simply becoming self-employed or creating a limited company. This is because partnership businesses offer a unique set of benefits, however there are also potential drawbacks. It’s only by weighing up the pros and cons that you can make an informed decision.
Advantages
One of the main advantages of partnership businesses is the relative lack of regulation. This means that both starting and ending the business is simpler and cheaper. For example, you don’t need to register the business with Companies House and taxation is easier, as there is no need to register for corporation tax. However, it’s worth noting that each partner must still complete their own individual tax returns.
Of course, the very fact that multiple partners are involved in running the business is another major benefit. Multiple business partners mean there can be a greater breadth of knowledge, expertise and a smaller workload overall. Not to mention, the peace of mind that a partner can provide, compared with the often-daunting task of starting a business alone.
Control is another deciding factor when choosing which type of business to create. Limited Companies often split control between multiple parties, with shareholders owning the company and director’s running it. This can cause friction, frustration and often slows down decision making. One of the advantages of a partnership business is that partners both own and run the business, therefore allowing for more control.
Capital is extremely important when starting a business, however it can often be difficult to raise. Partnership businesses can provide a solution to this problem as multiple parties can often mean greater capital. There is also an opportunity for those with good ideas to connect with those who can invest, creating a solid partnership.
Disadvantages
Whilst there are many unique advantages to partnership businesses, there are also some potential disadvantages to keep in mind.
One of the main drawbacks to this type of business is the fact that it’s not a separate legal entity- such as a limited company. The partners are the business and are therefore liable, should it face legal or financial issues. Also, as the business isn’t its own entity, it can often face instability. For example, a company could be dissolved, if one of the partners leave their position.
Multiple parties running a business can have its upsides, as we have discussed but there is flip side to consider. When more than one person is making the decisions, there can be a potential for conflict and therefore stagnation. It’s for this reason why choosing the right partner is so important.
The partnership model is best suited for smaller businesses, who are happy to remain small. Companies with aspirations of growth may find it difficult. The mixture of unlimited liability, lack of prestige when compared with limited companies and a tendency to struggle when looking for capital, means that growth is often fixed at a certain point.
The decision on whether to start a partnership business, or some other type of company will depend on you and your individual circumstances. However, that doesn’t mean you can’t ask for help from experts in this field. The team at Salhan Accountants provide comprehensive services aimed at start-ups, including advice and practical information on which business type if right for you.
