Advantages and Disadvantages of Partnerships

There are a number of advantages to having a partnership. Some of these include:
  • Partnerships are easy to establish. They can be established informally through the conduct of partners or formally by having the proposed partners enter into a partnership agreement. A partnership agreement will regulate the business of the partnership and the relationship between the partners including the ratio in which the partners will share in the profits and losses of the partnership.
  • Partnerships are tax transparent which means that the partners will pay tax on the profits earned by them in the partnership. Unlike companies, partnerships do not have to pay any form of corporation tax.
  • Where there is more than one owner of a business, such as in the case of a partnership, the partnership can raise funds a lot easier than a sole trader. This is because two or more partners may be able to contribute more capital to the partnership and because the borrowing capacity of the business in the eyes of the lender will also increase.
  • Prospective employees may be attracted to the business where there is a possibility that they can become partners – such as in the case of accountancy practices or law firms.
  • Public perception of partnerships can often be greater than that of sole traders.
  • Partnerships can be easily dissolved.
  • Unlike a company, a partnership is not required to file an annual return or a copy of its financial statements annually with the Companies Registration Office. As a result, a partnership’s financial statements do not become available to the public.

In addition to the advantages associated with partnerships, there are also a number of disadvantages including, but not limited to, the following:
  • Partnerships do not ordinarily have the benefit of limited liability protection. As such, the partners are fully liable for the debts of the partnership.
  • Partners are jointly and individually liable for the actions of their fellow partners.
  • Partnerships often find it more difficult to raise debt finance by comparison to limited liability companies and generally lacks the ability to attract equity finance and certain state grant aid which is normally allocated to companies.
  • A large number of partners can sometimes make it difficult for the partners to collectively make decisions.; or at least do so quickly.
  • Absent a properly drafted partnership agreement, the partnership may come to an end by the death, retirement, insolvency or disagreement of any partner.

 

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