In a previous post we covered sole traders as a business structure but in this post we will discuss partnerships along with their advantages and disadvantages.
What are partnerships?
This is when two or more people carry on any form of business together with a view to profit but with no intention to incorporate as a limited company form a partnership. This partnership could be unintended but it is differentiated from a sole trader due to the involvement of multiple people. When you establish a partnership you should draw up a formal agreement between each partner at the beginning. A partner could be an individual person or a limited company.
The amount of responsibilities differs according to the type of partnership which can be limited or unlimited. In an unlimited partnership there is equal sharing for bills and losses. In limited partnerships responsibilities are unequally shared. If a partner is ‘general’ then they are liable in a normal way, but if they are ‘limited’ they are liable up to the amount they initially contributed to the business. A limited partnership has to have at least one general partner whose liability is unlimited. In the case of limited liability partnerships all of the partners are liable up to the amount they have invested.
What are the advantages of partnerships?
One of the main advantages of partnerships is that the ownership and control remain with a specific number of people. This number is usually between 2 and 20 people by law. These people also enjoy shared responsibility and so they avoid problems if one or more are absent because of sickness or holiday entitlements. Limited partnerships and limited liability partnerships have better protection from financial danger and better flexibility when it comes to allocation of profits.
What are the disadvantages of partnerships?
Seeing as partnerships are not incorporated at the Company Registration Office this may be a barrier to new business opportunities which is a major disadvantage. Raising finance could be a challenge and also because it isn’t a separate legal entity, partners can be sued in their own names. Another disadvantage is that since individual partners are liable for the debts of the partnership without limit. This could mean that you are personally liable for another partner that you have never even met. As partnerships have no limited liability then a floating charge over assets cannot be created. Partners are also not entitled to transfer their holding in a partnership to another person or entity. If any claims arise then a partner’s assets are not protected or ‘ring-fenced’.
In Ireland some professionals are prohibited from forming companies so they operate in partnerships. An example of this is an accountant or lawyer as they must be personally liable to their clients. If this type of company structure doesn’t suit your business idea then you should consider looking at our company structure guide to find one that suits you.
