Business Partnership Explained
What is a business partnership?
Business partnerships can be a powerful way to grow your business by leveraging the expertise of others. However, it quickly becomes complicated when entering into a partnership with another company, or multiple companies. In this article, our accountants explain what a business partnership is and how it differs from other types of businesses, as well as some common challenges faced when setting up partnerships.
Partnerships are one of the most popular ways to start a business. They can also be an effective way to finance your company, especially if you’re not looking for investors or loans. A partnership is basically an agreement between two or more people who agree to work together in order to form a business. Choosing to form a partnership with someone lets you share the costs of running a business while each person has control over their own individual duties and responsibilities.
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Different types of partnerships explained:
A general partnership is a business structure consisting of two or more persons who have agreed to share ownership of a business in exchange for contributing money, property or labour, etc. It’s usually formed by people who are self-employed, however, a limited company can also be one of the partners. If a general partnership is formed by two sole traders working together under one business, they still have to submit Self-Assessment tax returns separately.
General partners are personally liable for the debts and obligations of their business, which means they can lose their personal assets if something goes wrong in their business.
Limited partnerships are similar to general partnerships but consist of at least one general partner who manages the company’s day-to-day activities, and also at least one limited partner. The role of the limited partner is more like a silent partner who has invested in the business. A limited partner has to be careful with their involvement in the business as they can lose their limited status. This partnership structure is not a separate legal entity.
Limited Liability Partnership
Limited liability partnerships (LLPs) are a type of business partnership where the liabilities of each partner are limited to the amount of investment they put into the business. It is similar to limited companies. If the limited liability partnership fails under limited liability, then creditors generally can’t make claims on a partner’s personal assets because the partnership structure is a separate legal entity.
How to split profits and losses in a business partnership
A partnership agreement should be drawn up to protect the interests of your partnership and to decide how you work together. It is a voluntary agreement, but any accountant would strongly recommend having it in place because, without one, the partnership will be controlled by the Partnership Act. This agreement should outline how to split profits and losses in the business. But if you decide to enter a partnership without an agreement, then the legislation rules apply and profits and losses are split equally between partners.
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Changes to partners in a partnership
When entering a business partnership, it’s important to understand what happens if changes need to be made.
Typically, if an existing partner retires or dies, or when a new partner joins, the original partnership must be discarded and replaced with a new agreement to accommodate the changes.
Apart from changes in terms of partners leaving or joining, other changes within a partnership can happen as well. This can include different split of profits, different salary arrangements or changes in responsibilities.
Advantages and drawbacks of a partnership
When you work with a partner, there are advantages and drawbacks to consider. The most obvious advantage is that you’re able to expand your business without the cost of hiring new employees. Partnerships typically come with their own set of advantages and disadvantages and the decision to enter into one shouldn’t be rushed. When you form a partnership with another person, you all share in the profits, risks, and responsibilities of running a company. This can be an effective way to create a new business or finance an existing venture.
Partnerships can also help companies navigate complex issues more easily, since they provide multiple perspectives on each issue. Partnerships are a great way to collaborate with someone who has skills that you don’t have, this way, you both learn from each other and do what you do best, not to mention that when one partner falls ill, it’s much easier for the other partner(s) to cover their workload until they recover, rather than outsourcing tasks or having to cancel commitments.
It can be hard to figure out what is going to happen if you’ve never worked with a potential business partner before. To avoid any potential problems, it’s important that you understand what you are getting into from the beginning and how both parties’ abilities complement each other. When negotiating agreements as well as setting up expectations for future interactions between partners, having experience working together prior to signing on any dotted lines helps ease the process and keeps everyone involved happy. It’s important to be sure that everyone involved has a clear understanding of the arrangement.
Business partnerships are a great way to start a business, but they also bring their own unique challenges. You need to be careful about how you structure your tax situation and make sure that you have the right insurance coverage for your business.
More than one person forming a business can also mean more arguments and completely different visions for a business. There’s also an increased risk of unhappiness on one side when profits are split. Additionally, if two partners have the same skill sets, it may be difficult to agree on a fair split of responsibilities. In a partnership without a limited liability for partners, one partner can put the other partner into a difficult situation when they’re not managing a business properly and in line with the current law.
Having your business finances in order is key to its success, but it’s often really difficult to find time between all the other tasks you have on your plate, and that’s why we’re here.
Joanna Bookkeeping offers a full range of bookkeeping and accounting services so that you can focus on what’s most important, growing your business!
Book a FREE call and have a chat with our Oxford-based accountants to learn more about how we can help your business partnership succeed. PLUS – because we’re fully digital, we offer services to businesses all over the UK!
Frequently Asked Questions
This depends on a type of a business partnership formed. In a general partnership, all partners are personally responsible and liable for the business's debt. In practice, it means that partner's personal assets can be affected. This is the same as with sole traders where a business and a person running a business is one. In a limited partnership, a general partner has a personal liability for the business's debts, just like in the case of a general partnership. The liability of a limited partner is limited up to their investment in the business and until their status stays limited. Limited liability partnerships, on the other hand, give all the partners limited liability for the debts and the limit is up to their contribution in the business.
A new partner can join a partnership any time during the year. It is stronly advisable to draw a new partnership agreement when a new partner joins to make clear what the profit split is, any interest rates, salaries and what the new reposnsibilities are for everyone.
There's no time limit on a business partnership. It can last as long as partners want to continue to work together and run a business. Partners leaving a partnership doesn't necessarily mean a partnership has to come to an end as a new partner can join to repalce the partner who wants to leave. The partnership would be terminated though in a situation where partners don't want to or can't work together anymore.
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