What is a partnership?

I have recently been asked about partnerships generally, and what distinguishes them from other business structures. It is important to have a firm understanding of the advantages and disadvantages of a partnership, before entering into one, to run a business.

What is a partnership?

A partnership is essentially an agreement made between 2 to 20 people to conduct business together. In contrast to a company, a partnership is not a separate legal entity. Each individual of the partnership will be seen individually in the eyes of the law, which opens each individual to potential personal liability should something go wrong.

What are the advantages of a partnership?

The advantages of a partnership include the following:

  1. Simple and cost efficient to establish;
  2. The risk and responsibility is shared;
  3. Skills and experience of different partners can be combined;
  4. There are less stringent reporting requirements, in contrast to companies.

Are there any disadvantages of establishing a partnership?

Some of the disadvantages of forming a partnership include the following:

  1. The partners are jointly and severally liable. This means that each partner’s personal assets are vulnerable to creditors of the partnership;
  2. Each partner is fully responsible for debts incurred by another partner;
  3. Changes of ownership are difficult; and
  4. The potential for disputes arising between partners over the sharing of profits and strategic direction of the business.

What are some of the things I should consider if I am establishing a partnership?

  1. Make sure you are confident with the parties you are entering into a partnership with; and
  2. Ensure you entering into a Partnership Agreement. This will set out how the partnership will run on a daily basis, and in the event that something goes wrong.

If you are thinking about establishing a partnership, or you are in a partnership and seeking advice, please do not hesitate to contact Sajen Legal.

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