Partnership in Business: Types, Advantages and Disadvantages

Partnership in Business:

A business structure can exist in various forms; and partnership exist as one of such business structures.

Partnership in business is often considered to consist of 2 - 20 persons, excluding married couples; coming together with the intentions to utilize their money and skills for the purpose of building a business together.

Please read on the concept of a Business Structure and Sole Proprietorship here.

Being a form of business structure, a partnership must be legally agreed upon. This implies that all members comprising the partnership business structure must agree to certain terms and conditions of the business. Regardless, a partner (member of the partnership) may take loan on behalf of the partnership business structure provided the legal agreement permits it.

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Types of Partnerships

Partnership can exist in three forms or types. These are:

1. General Partnership (GP)
2. Limited Partnership (LP)
3. Limited Liability Partnership (LLP)

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1. General Partnership

In general partnership (GP), all the partners must contribute towards the finance of the business. In addition, their various and unique skills may also be jointly utilized towards propelling the business.

General partnership requires that the partners equally share the profit generated from the business; while also bearing the loss together. Interestingly, they will also share equally any debt incurred in the business; even if it's illegally obtained by one of its members.

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2. Limited Partnership

A limited partnership (LP) implies that at least, one member must have a limited control of the partnership business. In this case, the LP must have at least one general partner and one limited partner.

Note: A limited partnership must consist of one or more general partnerships and at least, one limited partner. It should not be confused with the limited liability partnership whereby all the partners share a limited liability in the business.

In most cases, limited partners serve only as investors in the business. To this end, they tend to accept a lesser liability when things go wrong in the business; unlike the general partners who operate the business and will accept a greater liability.

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3. Limited Liability Partnership

A limited liability partnership (LLP) exhibit some of the features of limited partnership and corporations. This is so because some or all of the partners have limited liabilities (depending on the country's law where it's practiced); and they can exercise their right to directly manage the business if the need arises.

It is important to state that each of the limited liability partner is not liable for another partner's mistake in the course of business.

Note: Personal liability in partnership is limited to each member in accordance (ratio) to their contributions towards the business setup.

Advantages of Partnership

1. More startup capital is made available.
2. Easy to establish.
3. A partner may be more knowledgeable on the business, thus adding a great value to the business.

4. There is a better chance of getting loans.

5. The burden of a loss in the business is reduced since all the partners share a part of it.

6. There is no need for complex reporting in partnerships.

7. They are easy to dissolve if the need arises.

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Disdvantages of Partnership

1. Risk of disagreement between partners.
2. Other partners may be liable for a partner's debt in general partnership.
3. The nonchalant attitude of some partners can become a liability on the business.
4. There is a potential instability in partnership since members can easily withdraw from the business.
5. A partner may be liable for the negative business actions of others.
6. Debt liabilities can be unlimited.
7. A fee is payed when the certificate of a limited partnership is filed with the state. This is crucial before a limited partnership can be formed.

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