Advantages and Disadvantages of Partnership
There are already several hundred partnerships operating in India, making them one of the most popular business structures here. The sole proprietor and Limited Corporation are the most popular substitutes.
Optimistically stated, the partnership model allows you to start a firm with a partner without the assumed formalities of a limited partnership. Less favourably, with a partnership firm, you risk losing control over how your company develops without taking sufficient precautions. Here are some advantages and disadvantages of the same:
Advantages of Partnership
1. Ease To Commence
The partnership can be established verbally or in writing, as agreed by the parties. There is no need to file with Companies House, and it is easy to register the business partnership with HMRC for tax purposes. Additionally, each partner must sign up for self-assessment separately. This can be done online.
It's usually a good idea to set up a partnership agreement, even if it will require more time and money. This spells out the partnership's operation, the partners' duties and rights, and what might happen in several hypothetical circumstances, such as a fundamental disagreement between the partners or a partner's desire to leave.
2. Splitting the load
Working in a company partnership offers companionship and mutual support, which is preferable to running your firm as a lone proprietor. Starting and running a business alone might feel complicated and overwhelming if you've never done it before. In a partnership, everyone shares the risk.
3. Availability of information and experience
Each partner will contribute their expertise, contacts, and knowledge to the company, perhaps giving it a greater chance of succeeding than any of the partnerships operating independently.
Partners can divide up the work, with each partner focusing on what they do best and love most. As a result, if a partner has experience in finance, they might concentrate on keeping the company's accounts. In contrast, another might have had substantial sales experience and thus assume responsibility for that area of the organization. Contrarily, if you were a lone proprietor, you would have to handle everything independently.
4. Less formal with fewer obligations under the law
One of the key benefits is the absence of formality when conducting a partnership firm as opposed to a limited company.
In general, partnerships have a more straightforward accounting process than limited firms. Although the partnership business is exempt from filing a Corporate Tax Return, you must keep track of your income and expenses. Each partner must complete their self-assessment tax return with information on the partnership's profits and submit a partnership tax return to HMRC (as well as any other income)
Unlike a limited company, you are not required to file a confirmation statement. The partnership will never be forced to submit any other Companies House papers that a limited company would be required to submit. Additionally, there are fewer records to keep up with; for example, unlike a little corporation, a business partnership is optional to keep a set of statutory books. Without a formal partnership agreement, a partnership business can be readily dissolved at any moment, allowing each member to quit if they choose to.
5. Control and ownership are united
In a limited corporation, directors and shareholders (although they are frequently the same persons) share ownership and daily administration of the business. This could imply that directors are restricted in acting in what they believe to be the company's best interests by shareholder preferences.
In contrast, owners and managers are the participants in a business partnership. Without intervention from any shareholders, the partners are free to pursue their goals as long as they can agree on how to run and advance the partnership. Due to their capacity to respond more swiftly to changing conditions, associations may be more adaptable than limited companies.
The parties in a partnership can keep their business dealings private. Shareholders of a limited company may choose to view the various registers and documents the business is required to keep. A limited company's records, however, are available for public review at Companies House.
7. Extra capital and partners
The more partners in a partnership, the more capital may be accessible via their combined resources to make investments in the company, which can support growth. Their combined borrowing power is also probably higher.
8. Upcoming partners
Although you can hire employees as a sole proprietor, you can only indeed hire someone to run the company with you. Employees will always assume you are the one controlling the company, and good employees may get demotivated if they believe there is "nowhere to go" regarding their careers. In contrast, a general partnership typically allows for the admission of new partners. The possibility of becoming a partner, either at the time of joining or in the future, may entice qualified employees to join the company.
9. Easy profit access
The business's profits are split between the partners in a partnership. Instead of being initially retained within the partnership, they are passed immediately to the partners' tax returns. Contrarily, in a limited company, profits are held by the business until they are distributed as compensation via PAYE or, with the consent of stakeholders, as dividends.
Disadvantages of Partnership
While running a partnership business has many advantages, it also has some significant drawbacks, some of which are discussed below;
1. Lack of Separate Legality
A business partnership does not have a separate legal identity from its participants. By default, a block will end with the dismissal or demise of one of the partners unless an alternate partnership agreement is in place. This option can lead to uncertainty and instability, detract from efforts to advance the company, and is frequently not the preferred course of action for the remaining partners. Even if a partnership agreement exists, the surviving partners might not be in a position to buy the outgoing partner's portion of the company. In that instance, it will still be necessary to dissolve the company.
2. Unrestricted liability
Again, because the firm has no distinct legal personality, any debts or losses incurred are the partners' responsibility. Thus, if the firm encounters financial difficulties, you may be in danger of having your assets confiscated by lenders, which would often not be the scenario if the business was indeed a limited corporation.
The partners are responsible jointly and separately. One partner's ability to tie the partnership means you can be held accountable for the other partners' decisions. You will be liable for paying off debts if your partner cannot. When your partner has no assets, you can pay off 100% of the partnership's debts, which would require you to liquidate your goods in an extreme situation where you only hold 10% of the partnership.
3. Limited capital access
A partnership will frequently have more difficulty raising capital than a limited business, even if a group of partners will likely be capable of contributing more capital than a lone proprietor.
The increased accounting transparency, distinct legal personality, and sense of permanency that a limited company offers may be preferred by banks. A bank will either refuse to lend to a partnership business or do so only in less favorable conditions if it is considered riskier. Partnerships can't use a few other long-term financing options. The main difference is that they are unable to offer shares or other instruments in exchange for investments, unlike a limited business.
4. Slower and harder decision-making
Making decisions can take longer than it would if you were managing a company as a sole proprietor because you'll need to communicate and debate issues with your partners. You will spend time trying to reach an understanding or consensus where you disagree. This could sometimes result in missed chances. It will more frequently irritate a partner prone to taking all of the decisions regarding their company.
5. Perception of low prestige
Like a sole proprietor, the partnership business form frequently seems to lack the grandeur more typically connected to a limited corporation. Partnerships seem like transient companies, yet many are long-lasting because they lack independent existence outside the partners themselves.
Because of this image of transience and the inability to independently verify the partnership's financials at Companies House, there may appear to be an additional risk. Due to this, specific customers will prefer to do business with a limited partnership and might even refuse to do so with a partnership corporation.
6. Possibility of disagreement and conflict
You give up your independence when you choose to operate as a partnership agreement rather than a lone proprietor. The likelihood is that you won't always get your way, so it will be necessary for each partner to show some flexibility and a willingness to make concessions.
The possibility of having significant or minor disparities with other partners exists. These may be connected to the following:
It could take a while for differences to become apparent. The alignment of partners at the beginning is not a guarantee that there will be issues afterward because preferences, circumstances, and expectations might change with time.
Conflicts and disagreements can harm the business and the relationships between the parties. The partners' time, energy, and resources may be significantly diverted by conflict.
The creation of a partnership agreement, also known as a deed of partnership, is therefore often advised when forming a commercial partnership. This agreement guarantees that the partners' respective rights and obligations are spelled out and that there is a shared knowledge of the dispute resolution processes. The partnership deed will also specify what will happen if the alliance needs to be dissolved.
7. Profits have to be distributed.
On a fundamental level, a partnership's profits are divided among the partners, but a solo proprietor's firm profits are entirely their own. Profits are distributed evenly by default under the Partnership Act of 1890, though a partnership deed can change this rule.
Equitable profit distribution might bring up challenging issues. How do you rate the abilities of the various partners? What occurs when one partner appears to be investing less effort and time in the partnership but still receiving their part of the profits? If the ratio of effort to reward doesn't seem balanced somewhat, resentment is likely to develop.
In the past, if a company produced more than a particular profit, individuals may withdraw a mix of salary and dividends through a limited company without paying as much tax as they might through partnership draws. However, this discrepancy is much less pronounced since that dividends are no longer taxed as income.
A limited corporation still offers more chances for tax planning than a corporate partnership. The partnership's gains are transformed into income for the individual partners, who are then taxed on them in the fiscal year they are received. Profits cannot be held in the partnership until a subsequent year when a partner's income may be lower to be extracted as income.
Your unique situation will determine which business arrangements are the most tax-efficient. Always seek the opinion of a tax expert who can provide guidance based on your situation.