The Pros and Cons of entering into a Partnership
While Valentine’s Day is very popular for partnerships of the romantic kind, we’ve been considering those of a more professional nature.
While we wouldn’t presume to give advice on matters of the heart, we do know business and would urge anyone thinking of going into business with a partner to consider the pros and cons first.
So what are the Pros of a Business Partnership?
1 Theoretically a partnership can be easier to set up and can mean less paperwork than a limited company incorporation.
2 You can achieve more and each party brings additional knowledge, skills and contacts to the organisation.
3 Two heads can be better than one when it comes to bouncing around ideas or discussing problems and solutions.
4 Potentially you may have more capital available for setting up and investing in the business, whether that’s paying for premises, equipment or employing and training staff.
5 You may have greater borrowing power if you need to borrow from a financial institution.
6 You can take advantage of the unused Personal Tax Allowances of each partner and therefore reduce overall tax liabilities.
7 National Insurance Contributions – it’s always good to keep your State Pension topped up, this time by making some profit-based contributions each year.
8 Compared to a limited company where certain documents are made available to the public, partnerships have more privacy.
That all sounds very positive but what are the Cons of such a venture?
1 The profits are divided between each partner so the partnership needs to be efficient with everyone putting in as much work.
2 You will have less independence because you’ll need to take into consideration the opinion of others and this may lead to disagreements.
3 It may be hard to separate from the business if the partner is your friend or a relative. Equally, stresses in your personal relationship may create problems for the business or vice versa.
4 You have unlimited liability. In short, you are liable for the debts of the partnership; your own share and all the debts including those of each partner.
5 In addition, you are liable for the actions of the other partners.
6 National Insurance Contributions are based on the profits you make whereas when trading through a limited company you have a lot more control and flexibility over the level of contributions you make each year.
7 If a partner leaves the business, this could be complicated and costly. If no partnership agreement is in place with provision for this kind of risk, the partnership may have to be dissolved.
8 Privacy is a double-edged sword. As a partnership’s financial information cannot be independently checked some financial institutions may be less willing to lend money or provide as favourable lending terms as they would with a limited company.
Developing a business idea with a friend, former work colleague or relative and setting up a business in partnership can be exhilarating and less daunting than going it alone. However don’t get carried away with the excitement of it all without considering some formalities.
While one of the pros of going into partnership may be that it is less onerous than setting up a limited company, and the accounting may be simpler and cheaper, we would strongly advise that a formal Partnership Agreement is agreed and in place from day one!
You may feel uncomfortable having a conversation about how the partnership will work, what the rights and responsibilities of each partner are, or what should happen if a partner wants to leave, but these are important considerations.
At Lewis & Co we have been helping would-be partners have these conversations for decades. So if you would like to talk to an experienced and objective expert, please contact 01892 513515 or email firstname.lastname@example.org
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