We learned about the sole trader, and today we will look at partnership. What it means and the advantages and disadvantages.
Definition
A partnership is formed when two or more people agree to work together and put money into the business to reach the same goal. All the parnter are equally responsible for debt.
Characteristics of a Partnership
1. It is an agreement between 2 or more people.
2. The agreement can be in writing or orally.
3. There is no legal requirement except the contract that must be drawn up between the partners.
4. If the business have debt, all the partners are responsible.
5. Each partner must make a contribution, be it in the form of money or expertise or both.
6. The money put into the business is controlled by the partners.
7. The profits will be shared among the partners, depending on how much they put in.
8. If the business does not turn a profit, it will be liquidated, the creditors will be paid and if there are money still outstanding, the partners must pay it.
Advantages of a partnership
1. It is easy to start a partnership. There are very few requirements.
2. The partners will put money into the business to expand it.
3. There are more than one person so there are more ideas and talents that come into the business.
4. Everybody will share the responsibility of the business so if one goes on holiday, the others can still carry on.
5. The profit are shared among the partners and therefore everybody is motivated to work hard.
Disadvantages of a partnership
1. The partners are personally responsible for the debt of the business.
2. The partners are responsible for each other's decisions and actions.
3. It is easier to make a decision if only one partner decides, but now everybody has an input and can take up a lot of time to come to a decision.
4. There can be a lot of problems if one or more partners are lazy, inefficient or even dishonest. There can be arguments, the business may lose money and the other partners will have to work harder.
5. The partnership may terminate on the death of a partner, unless there are sufficient funds available to buy the deceased partner’s interest or indicated otherwise in the partnership agreement .
6. Changes or transfer of ownership can be difficult and generally require a new partnership to be established unless indicated otherwise in the partnership agreement.
7. On dissolution, the assets are liquidated, creditors are paid and partners must stand in for any shortfall.
Watch the video for more information on starting a business and deciding what type of ownership it will be.
