Starting a business is more than simply knowing what to sell. You need to choose a business structure. Partnership is one of the business options to opt for. To help you understand if it is for you, we have curated what you should watch out for in this article.
What's a partnership?
A form of business organisation formed by a minimum of two persons to carry on business together for profit. For two or more people to come together for business, they must share a common interest. For example, lawyers with an interest in forming a law firm can partner to do so. They share a common interest in law, and as a result, they can operate a business together.
Profit is the primary motive of a partnership business. If the parties are coming together to do business without making a profit, then a partnership is not a viable option. Each partner is expected to make a contribution to the organisation. This usually comes in funding, skills, and reputation.
The contribution depends on the type of partner. A general partner will contribute funds in terms of capital to the business. An active partner will contribute his skills while a dormant partner will contribute his reputation. By reputation, it means that a mention of the name of the partner can help bring business deals.
How to know if a partnership business is right for you
Need for new skills, capital and reputation
Owning a business as a partnership becomes an option when an entrepreneur has limited skills to run the business. It is established whether each partner needs to specialise in a particular business area.
For an entrepreneur, as his/her business expands he/she may require more capital or additional skill set or a reputation from others. The entrepreneur may agree to partner with people who have the required skills and reputation to join the business as partners.
Better support
There is a saying that two good heads are better than one. In partnership, each partner can support themselves. When one cannot carry on through a circumstance, the other can continue. You may have seen an accounting firm run by a family. The husband and wife are partners of the firm. Therefore, they can support each other while running the business.
Transfer of tax liability
A partnership business does not pay taxes. The profits earned are divided among them based on the agreement. Then each partner computes their tax liability.
Less expensive to form
Compared to a limited liability company, a partnership business is less expensive to form. You will spend less than 50,000 Naira to establish it in Nigeria. The amount is based on current charges by the CAC agent and may likely change in the future.
Business privacy
Partnership businesses enjoy business privacy. If they are earning billions of Naira the public will not be aware of it. Therefore, it can form silent billionaires and provide professional services to customers.
Limitations of running a partnership business
Partnership business might be a better option but it comes with its limitations. You need to understand these limitations so that you will know the dangers involved in operating this business model.
Precarious and unlimited liabilities
All partners have precarious and unlimited liabilities. Precarious is an implied liability. That is, a liability of one partner becomes the liability of all the partners. Also, in the event of bankruptcy, each partner may be affected up to their personal belongings if the available assets cannot clear the debt.
Limited available funds
There is a limit to the amount of funds each partner can contribute. This reduces the total capital available for the business.
Trust issues
An association of individuals may result in trust issues when money is involved. This can bring an end to the partnership. Therefore, care should be taken to ensure that no single partner can withdraw money from the bank without the consent of at least another partner.
Death or retirement of a partner
From partnership law, the death or retirement of a partner will bring the partnership business to an end. This limitation makes this business organisation expensive to run. When a partner dies or retires, additional formation costs will be spent to continue the entity.
Decision making
If all the partners have to be engaged before a decision is made, it will slow down the decision-making and kill the speed of business operations.
To conclude, businesses are run as partnerships when it involves professionals such as accountants, lawyers, doctors and engineers. However, the owners must know what they want to achieve before choosing it because of its inherent disadvantages.