Are you starting a business with one or more people? If yes, getting into a Partnership business model makes sense. However, one has to be aware of the advantages and disadvantages of a Partnership firm before entering into the business.
In this article, we have covered the Partnership business model’s pros and cons in detail. Please have a look at it below.
What is a partnership business?
A Partnership business model is a formal agreement between two or more people to become the company’s co-owners. The partners involved in the company have the right to invest and share profits and also losses. All the features related to the Partnership firm are directed by the Indian Partnership Act of 1932.
Advantages of partnership
Extra hand for business: Business people are often busy with their hectic schedules like business meetings, calls with the employees, making investments in other companies, etc. If you have an extra partner, they will likely take care of the day-to-day business activities and ensure a smooth process. More partners can ensure faster task completions.
Easier formation: Unlike LLP, a Partnership firm requires lesser legal formalities and investment to start the business. Moreover, registration of the firm is also not required in this business model. The partners only need to enter the Partnership deed.
Benefit from partner knowledge: Additional partners means additional ability. More partners can bring more business knowledge to the table, which helps run the company smoothly and profitably. For example, you might have technical knowledge of the product but need to learn how to market the product. In comparison, the other partner might have marketing knowledge and not technical knowledge of the product. When both of you come together, it makes the business profitable.
Less financial burden: Starting a business alone might be capital intensive, especially in industries where inventory, retail space, and equipment are required. Having a partner can lessen the financial burden on your shoulders, as the investment will be split between two.
Less paperwork: Special paperwork is not needed to start a partnership firm. Only a partnership agreement must be signed by all partners involved in this business. The agreement consists of all details related to the decision-making, profit sharing, and how the losses will be divided.
Fewer tax norms: Business tax forms are not needed to be filed. The tax will be filed through individual business partners, as the taxes will be shared among the partners. Any profit made through the company will be taxable through the business partners’ shares.
Risk sharing: As the partnership firm involves many business partners, the losses and the profits will be shared among the partners. Hence, the risk also will be shared among the partners. In short, the risk is less compared to running a business as a sole proprietor.
Privacy: A partnership firm need not disclose all the details publicly. Whatever happens within the business will stay within the business partners. Moreover, the company’s trade secrets will not be leaked to outsiders as the business partners take all the decisions.
More straightforward dissolution: Dissolution of the partnership firm is simple. The company’s insolvency is more straightforward in case the partner exits the firm.
Disadvantages of partnership
Can’t make your own decision: Since more than one person is the firm’s owner, decisions cannot be carried out by one person. It would be best if you worked with the other partners before making any business decision. If a partner makes an irresponsible decision, the other partners are held responsible for the consequences.
Disagreements with a partner: When multiple decision-making is involved, there might also be a conflict of decisions. Sometimes, you need to disagree with your partner, and in specific scenarios, they or you might need to exit. You should redistribute the profits and strategize the partnership shares again.
Have to split the profit: When you run the business alone, the profit will be yours. However, when you run the company along with one or multiple partners, the profit earned in the business will be split. Depending on the number of partners, the profits will be shared.
Unlimited liability: Every partner is individually liable for the losses incurred in the business. The liability made by one partner will make the other partners pay for the losses. The only way to limit this liability is to shift to the LLP business model.
An individual tax of partner: Though being taxed individually has its advantages. When compared to business taxes, the tax incurred for an individual will be more. In the case of a Partnership firm, the taxes are passed from business through individuals. So, each partner must pay more taxes than collectively pay through the company.
Lack of public trust: The public has less trust and confidence in the partnership business model, as it has few rules and regulations in establishing the firm.
The advantages and disadvantages of a partnership should be carefully considered before making a decision. Partnerships can be a good option for individuals who are comfortable with the unpredictability and are willing to take on the liability. However, a corporation or limited liability company may be a better option if you prefer a more stable environment and want to protect your assets.