When you first start a business, it can be daunting if you have to do everything by yourself. For this reason, many choose to set up a business with someone else, in the form of a Partnership. A partnership is two or more people in business together. You can set up your business with one or more friends, relatives or anyone you share business interests with.
A Partnership is as easy to set up as a sole proprietorship and does not require much extra admin or keeping of complicated financial records. It is, however, advisable to consult an accountant prior to setting up a Partnership. They can go through the registration process with you and answer any tax related questions you may have.
How to set up a Partnership
There are some steps you need to follow to set up a Partnership
- Decide on a name for your business
- Decide on a profit sharing ratio
- Register with HMRC
There are two other kinds of Partnerships – the Limited Partnership, where one partner in the business is a Limited Company; and the Limited Liability Partnerships. We will deal with these in separate blog posts.
Advantages and Disadvantages of Partnerships
There are two sides to every business structure, so here are some of the advantages and disadvantages for partnerships.
Advantages
You’re not on your own. – As already mentioned in the introduction, when you set up your business as a partnership you have someone to share things with. You get to share responsibility, skills, expertise, and contacts. Also, you can make decisions together, rather than managing things alone as a sole trader.
You can, of course, also share your financial resources and therefore your borrowing capacity may be greater.
Easy to get started – you can agree a Partnership verbally or in writing. It is, however, recommended to set up a Partnership Agreement as a legal document. This document states the roles and responsibilities of each partner and what happens if one of them should leave the Partnership.
You and your partner(s) control the business – no one else. Decision making is a case of coming to an agreement with your partners. There’s no need to get any shareholders involved, as you would have to do in a Limited Company.
Disadvantages
Unlimited liability – because the business does not have a legal status of its own as it would in a Limited Company. All partners are fully liable for any debts the business incurs. Each partner is jointly and severally liable for any liabilities regardless of the profit sharing ration.
Potential for problems – as good as it is to share decision making, it can also lead to problems if the partners cannot agree. This can slow down business dealings with suppliers or clients, or even bring the business to a temporary standstill if there is indecision about the strategic direction of the business.
Exit of a Partner can lead to the end of the business – if one of the partners wants to leave the business, they will most likely need to be bought out. If there is not enough cash to do so, the remaining partner(s) might have to liquidate the business (and personal) assets to do so. The same can happen if a partner dies and the heirs or beneficiaries might want to be bought out of the business.
How Alba can help
When you’re starting out, we can advise on the best setup for your business and whether a Partnership is the right business structure for you.
Why not call us for an informal chat on 01509 853779 or send us an email at admin@alba.uk.com and we’ll set up a suitable time to call? If you’d like to find out more about our services for business start-ups first, please click here.
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