Benefits of Business Partnerships: What Are They?

Business Partnerships, including limited liability partnership, are a common business type in the UK. It is a kind of middle ground between the sole trade and limited company.

Deciding whether a partnership business is the right business model for you can be tricky, but it is worth spending some time researching the advantages and disadvantages of each business type before committing to anything.

A general partnership is a business structure where two or more parties equally share profits and liabilities, as well as the responsibilities and potential conflicts. This contrasts with other types of business partnerships, such as limited partnerships, where the liability and responsibilities can differ.

In this blog, we’ll take a close look at the benefits of a business partnership, as well as some of the disadvantages of this business model.

On the face of it, a business partnership enables you to go into business with someone else without the perceived formality of a limited company. On the other hand, partners will be liable for all debts incurred by the partnership.

The Key Benefits a Business Partnership

Less formal and less legal obligations

There is far less formality associated with a business partnership than a limited company. In other words, things are altogether much simpler.

A business partnership does not need to complete a corporation tax return (though you still need to keep accurate records of income and expenses). Instead, a partnership tax return must be submitted to HMRC and each partner must complete their own self-assessment tax return.

Unlike a limited company, you don’t need to complete an annual confirmation statement or any other of the many forms Companies House expects limited companies to complete.

Easier to get started

There is no need to register a business partnership with Companies House and registering the partnership for taxation with HMRC is relatively simple.

Having said that, we do tend to recommend that when setting up a partnership, you put in place a partnership agreement. While taking up more time and adding an additional cost, having documentation that clearly states how the partnership will work, the rights and responsibilities of partners and what would happen in certain situations if things didn’t work out is well worth having. Additionally, a business partner can help explore additional business opportunities.

Share and share alike

There are undoubtedly benefits to going into business with someone else. While a sole trader must carry the full burden of running the business by themselves, partnerships benefit from companionship and mutual support.

The sharing doesn’t stop there though, each partner can share their own knowledge, skills, experience and contacts with each other, potentially giving the business a better chance of success than any of the partners trading individually.

Sharing the financial burden of running the business can also lead to more cash and cost savings for all involved. It is important to choose business partners who share work ethic, vision, and values to avoid potential conflicts.

More privacy

The affairs of a strategic business partnership can be kept completely confidential, whereas limited companies must make some information public. Limited Company documentation is available for public inspection at Companies House and a company’s shareholders can choose to inspect various registers and other documents the company is required to keep.

Tax efficiency

When in a partnership, you draw profit, as opposed to receiving a salary through PAYE or taking dividends. For this reason, partnerships offer the ultimate flexibility. You can split all the profits any way you want.

Partners pay tax on their share of profits which will likely include national insurance payable on their individual tax returns.

Disadvantages of a Partnership

If we could sum up the primary benefit of a partnership in one word, it would be simplicity. However, this simplicity comes with its own set of challenges that can impact the overall health and success of your business. While partnerships can offer ease of setup and shared responsibility, it’s essential to weigh these benefits against the potential drawbacks.

Personal Liability

One of the most significant disadvantages of a partnership is the issue of personal liability. In a partnership, business owners are personally liable for any debts or losses incurred by the business. This means that if the business fails or faces legal action, the personal assets of all partners could be at risk. Unlike limited companies, which provide a degree of protection to personal assets, partnerships expose each partner to potential financial jeopardy.

Difficulty in Raising Capital

Raising capital can also be more challenging in a partnership. Investors often prefer the business structures and perceived stability of limited companies, which can make it difficult for partnerships to secure funding. This can limit growth opportunities and make it difficult to expand the business or invest in new projects.

Loss of Control

Another disadvantage is the potential for loss of control. Decisions in a business partnership must be made jointly, which can lead to disagreements and conflicts. The need for consensus can slow down decision-making processes and hinder the ability to act quickly in response to market changes or business opportunities. This can be particularly problematic if partners have differing visions or goals for the business.

Shared Profits

In a partnership, profits must be shared among the partners. This can sometimes lead to disputes, especially if there is a perception that the contributions of some partners are not being adequately rewarded. The division of profits needs to be agreed upon and clearly outlined in the partnership agreement to avoid misunderstandings and conflicts.

Potential for Disputes

Business partnerships rely heavily on the relationship between the business partners. If this relationship deteriorates, it can have a detrimental impact on the business. Disputes over management styles, financial decisions, or the direction of the business can cause significant disruptions. It’s crucial to have a solid partnership agreement in place that outlines how disputes will be resolved and what happens if a partner wishes to leave the business.

Unlimited Liability

Unlike limited companies, where shareholders’ liabilities are limited to their investment, partnerships have unlimited liability. This means that each partner can be held personally responsible for the entire amount of the business’s debts, not just their share. This unlimited liability extends to the actions of other partners, meaning you could be held accountable for decisions made by your partners, even if you were not directly involved.

In truth, many of the disadvantages of partnerships are the advantages of limited companies or sole trades. We recommend that you read our blog on limited companies if you wish to gain a better understanding of the differences between the two.

If you need help and guidance setting up a business and/or choosing a business model, contact us to book a free, informal consultation. By understanding your business, we can recommend the best business structure for you.