Advantages of a Partnership: Everything You Need to Know

When deciding on a business type, you may wonder about the advantages of a partnership. There are various pros and cons to all business types. As a result, the preferred type you choose to start may vary depending on the needs of the specific business structure and the parties in question who hope to start the company. 

Types of Partnerships

If a company operates as a partnership, there are two distinct ways of doing this - as a general partnership and as a limited partnership.

A General Partnership

A business with more than one proprietor has the benefits of a wider pool of knowledge, aptitudes, and contacts when compared to a business that is operated by a sole proprietor. Further advantages of this type of business include:

  • Easy to set-up
  • Do not have to pay income tax (profits and losses reported on each partner's personal tax return form instead)
  • Easier to raise funds
  • Prospective and current employees motivated to work for the organization if the opportunity to become a partner exists.
  • Cost-effective: Each partner specializes in a certain area of operation.
  • Partners support each other, and the collaborative efforts make way for brainstorming opportunities.

Disadvantages of a General Partnership:

In a general partnership, each partner is responsible for the commitments and responsibilities of the business, unless a business "prenup" is signed. The predominant concern for this is if one or more parties decide to exploit the business in some way, or make any mistakes, then all parties are responsible for the fallout, not purely those involved in the matter. Further disadvantages can include:

  • Since the business operates as a group of collaborative individuals, rather than as one unit, if a third party decided to sue any partner, they can sue them as an individual rather than as the entire company.
  • If the business gets into financial difficulty and does not have enough cash or assets to cover the costs, then the partners will have to utilize their personal assets.
  • Can be unstable - a partner may die or decide to withdraw from the company. Fall outs and situational changes are also a potential risk.
  • Decisions cannot be made independently; all partners must consult each other before proceeding with an idea, so there is slightly less flexibility here than in a sole proprietorship.

A Limited Partnership:

The alternative to a general partnership is a limited partnership, which operates in a similar fashion, however there are limitations put upon the involvement of partner's personal assets and expectations in relation to the business.

The key advantages to this type of business are:

  • Partners have limited liability when it comes to problems and lawsuits.
  • It is easier to attract investors as a result of the limited liability

Disadvantages of this can be:

  • State fees must be paid and a Certificate of Limited Partnership filed before the business can operate.
  • If a partner becomes active within the company, then they may earn a general-partner personal liability which then means that they will be fully liable for the business' debts.

Sole Proprietorship

If one person is the sole bearer of an idea and they feel that they would prefer to go it alone, then they can consider a sole proprietorship - something that also comes with its share of pros and cons.

The advantages of this are:

  • The owner has the independence and flexibility to run the company as they see fit.
  • No required registration fees equate to less start up costs than in a partnership.
  • There is little paperwork required to start.

The disadvantages of a sole proprietorship are:

  • The owner has fully personal liability for any issues with the business.
  • It may be difficult for funds to be raised since they are the predominant source of cashflow for the company.
  • The business may close if the proprietor passes away.
  • It does not enjoy the same advantage of having executives with different distinct knowledge/experience as a partnership does.

If a sole proprietorship is being started, there are several questions which the individual must ask of themselves and what they seek to achieve, such as:

  • How is the company going to be financed?
  • What job roles will exist and what if one individual fails?
  • What is the "plan B" if all does not go as hoped?

It is recommended that the individual hire a legal counselor for guidance and to help them by creating an affiliation declaration for the proprietor.  

If you are currently wondering about the advantages of a partnership, you can post your legal need on UpCounsel's Marketplace. UpCounsel only accepts the top 5% of lawyers to its site, and they come from schools such as Harvard Law or Yale. Our lawyers have an average of 14 years of legal experience, and this includes working with prestigious companies like Google and Airbnb. For the latest legal news, and further information on running your business smarter, you can view the UpCounsel legal blog