Question

Why would businesses decide to conduct their operations as a partnership? What are the advantages and disadvantages of partnerships? Are there better alternatives?

Answer 1

1. Why Partnership?

There is no better approach to solving challenges than the famous saying "two heads are better than one." Whether creating internal partnerships between colleagues or departments, to larger partnerships between businesses, harnessing the strengths and abilities of others from different corners of your ecosystem is one of the most strategic ways for businesses to scale their innovation and solve complex challenges.

In today' fast-paced environment, a "do-it-alone" approach is not the best strategy for growth. Companies that initially grew organically need to look for new ways to drive collaborative innovation that delivers on what their customers need today – and in the future.

Collaboration and strategic partnerships are fundamental to improving business outcomes.

2.Advantages of a partnership include that:

• Two heads (or more) are better than one.
• Business is easy to establish and start-up costs are low.
• More capital is available for the business.
• Greater borrowing capacity.
• Highly capable employee can be made partners.
• There is opportunity for income splitting, which is an advantage in particular importance due to resultant tax savings.
• Partners’ business affairs are private
• There is limited external regulation
• It is easy to change your legal structure later if circumstances change.

Disadvantages of a partnership include that:

• The liability of the partners for the debts of the business is unlimited
• Each partner is ‘jointly and severally’ liable for the partnership’s debts; that is, each partner is liable for their share of the partnership debts as well as being liable for all the debts
• There is a risk of disagreements and friction among partners and management.
• Each partner is an agent of the partnership and is liable for actions by other partners.
• If partners join or leave, you will probably have to value all the partnership assets and this can be costly.

3) The alternative to partnership is a private company.

However, advantages a Partnership has over a Company:

• A simple agreement between two or more people is the only pre-requisite to start a partnership firm. For the Company, there are a few procedural formalities to be fulfilled.
• A company is managed by the directors and members with actions governed by organisations. While it is only the partnership agreement that governs the partners. This is why the flexibility and freedom to take decisions is higher.
• Termination of a partnership firm is easier than the Company. It is so because of the agreement which is valid only between the partners regarding the closure is enough. Company closure will require everyone to follow a proper winding up procedure has to be followed.
• The company holds a greater amount of credibility compared to other business structure due to its high compliance requirement.