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What is Partnership?

The business partnership involves the coming together of two or more people in a business venture. The need for the business partnerships may arise for various reasons which include the need to expand, the need to raise capital and the need to be profitable. At times partnerships may develop from sole proprietary business ownership as the person sees the need to expand and include more hands in the running of the business.

However, business partnership entails more than the agreement of two people coming together for a business purpose. The formation of the Business partnership involves more than agreeing to become part of the business. It involves intricate things like sharing profit and losses, taking responsibilities and making the right business decisions. Before entering a partnership with anybody, you have to consider the following:

• There must be a high degree of trust between the parties involved. If for any reason, there are signs of mistrust, then the partnership is set on a shaking foundation. Conflict arising from the partnership will harm the business.
• All parties involved must be willing to work together through the worst-case scenario. Seek the view of each partner involved in sensitive issues and ensure all parties are in the same level of agreement.
• Each partner should have their separate legal representatives to look into the process of the partnership. Conflict of interest might arise when they have a single representative at the point of signing the agreement.
• Always ensure that the fine prints in the agreement are clearly understood. Changes and ramification should be made to the documents if there are unclear statements before they are signed. That is the essence of having a separate representative during the agreement process.

The Different Forms of Partnerships

The different forms of partnership are based on the stakes the people involved have in the company. It is vital to understand the structures of partnership and determine the stake of each partner in the business. We are going to analyze these several forms of partnership and select the ones which will be perfect in our industry:

1. The general form of partnership

The general form of partnership is the simplest where people come together to carry out business activities. With this form of partnership, there is no need to file the agreement with the states. It is more like two or more people coming together to manage the business without much legal binding.

They have to obtain a business license which is one of the primary requirement, but they do not have to hold annual meetings, issue end of year statements nor do they have to keep their assets separate from the business. In this form of partnership, there is a high risk of losing your assets to the company. Furthermore, the role of the partnership and what may dissolve the partnership will be clearly stated in the contract.

People prefer this form of partnership because it is easy, cheap to operate and more flexible. However, it is not suitable when many people are involved and for large corporations.

2. The limited partnership

In the limited form of partnership, there is a clear distinction of roles by the partners involved in the business operation. One has limited access, and the other has unlimited access in the business, and that partner will be responsible for the everyday running of the company. However, the partner with the limited access in the company is more like a silent partner with no significant input to the business.

This form of partnership is common in most organizations where the one with the limited access usually have significant capital. However, the reverse may also be the case where a business has several limited partners whose interest is to bring in the funds and take their profit. These kind of partnership are suitable for short term investors who are looking to catch out quickly with a company.

3. The limited liability partnership

Now the limited liability partnership in the form of partnership for professionals and large corporation. In this form of partnership, your assets are protected from the business, but not limited to malpractices or personal misconducts. Investing in large corporations or shareholders have a limited liability kind of partnership, and only their capital is at risk.

It is essential to know about these forms of partnership if you want to know about partnership. They correlate in understanding what the business partnership is about and to find the one that suits you.

The features of the partnership

Every form of partnership has unique features, and we are going to discuss these features in this section. Most sole businesses usually transit to partnership as the company grows, and it needs more funds, improved management and expertise. The business owners may decide to bring in one or more people into the business.

This partnership has some features or characteristics, as shown below:

1. The partnership has more than one persons.

One of the unique features of partnership is that it is made up of two or more people. There are no limits to the number of people that can come into partnership to form business partners; however, they have to develop the right kind of partnership. Laws in certain places demand that a company will have to register as a joint-stock company to legally operate with a certain number of people as partnership.

Usually, there is a transition in the number of partners in business as the company grows. For a sole proprietor, the business owner may opt for another partner to help fund the expansion of the business. While for a larger organization, may opt for more people in the cooperation for more funds and expertise’s in the organization.

2. An agreement for the partners

They are a form of agreement before people come together in a business partnership. The different ways that people can go into an agreement include oral, written or implied, however, for a better legal representative, it is best to have it in written form and have the partners involved sign in the presence of their councils.

The agreement will bind the partners together, taking care of any legality in the sharing of duties, responsibility, capital and profit-sharing. For limited liabilities partnership, they are usually formed legally in written documents, while general partnership may be done orally or in an implied form.

3. Registration of the business partnership

There are benefits for a business to register with the states, although this may not be compulsory in some areas. But if you are going into partnership to improve your business, then you should consider registering your business to be legal with the states. Then you can enjoy the benefits of the law binding the partnership and business structure. Depending on the company’s network, taking the partnership to the legal path, it will be protected by the laws of the land.

It will be easier to solve disputes in the court of law, take actions against people for the benefits of your business and the legal settlement of claims. The company should take their forms of partnership to the local government council to legalize the process. There may be charges involved in the registration of the business, but it gives the company a legal binding with the state.

4. Sharing of profit and losses

Any form of partnership will involve plans on how to share the profit and losses of the business. To avoid crisis, the partners have to agree on the process of sharing the profit and losses of the company and ensure that all involved are in agreement. The sharing of the losses may be different depending on the form of the partnership, for a limited partnership does not incur personal assets to the losses of the business. Before going into any form of partnership, you must understand the profit and loss sharing system. And if you are comfortable with the process of sharing losses and satisfied with the profit-sharing system before agreeing with the partnership.

5. The agency relationship

each partner is a representative of the company and can stand on behalf of the company. The partners will be held accountable for their actions, and the actions of each people will reflect on the organization. Thus the need for partners to meet up and align their interest with the condition of the business. And understand the implication of their action to the brand. There are situations where partners will be suspended or removed because of misconduct and its effect on the business.

6. Collective responsibility

The partners are responsible for all the decisions made in the company. Any decision is binding to the group of partners, and they will bear the benefits or consequences of the decisions. Everyone should be concerned and involved in the decision of the business, and in cases of disagreement, the popular vote has to stand as the decision.

7. The transfers of shares or holdings in the partnership

One of the features of partnership that protect the interest of the company is that no partners can transfer their shares or holdings of the partnership without due knowledge on consideration of other partners. This act is to ensure that the partners are protected from outside influence who may want to take over control of the business. If you want to sell out to outsiders, the partners have to come into an agreement before the sale can go through.

8. A partnership built on mutual trust and confidence

The partnership for the business is built on trust and confidence in the group of people. It is expected that everyone involved will act accordingly in the interest of the group for a common purpose. Any form of deviation from this trust and confidence will affect the partnership and may cost the business negatively. In some situation, the deviation may cause the dissolution of the partnership since it may yield a negative result.

Merits of Partnership

There are several reasons while businesses will like to go into partnership or look for more partners. And the benefits of partnerships include the following:

1. The partnership is easy and quick to form

One of the merits of partnership is that it is so easy to form, without much complication. People do not have to involve any form of legal process or spend money to create a partnership. They may decide to complete the agreement without affecting any way of registration. However, the registration can be done with minimal expenses which are benefits of getting more people involved in the business.

2. There is more capital for the business.

With more people getting involved in the business, there will be more money to start and run the business. Initially, if you have an idea of a good business prospect, you can consider getting more investors as partners who will share in the profit. Each partner will be entitled to a profit-sharing formula which depends on the amount they have invested. Thus if the idea seems prosperous, then the investors will be willing to invest much money which will ensure the smooth operation of the business.

3. Improved productivity

Shareholders are usually interested in the sharing of profit, and they may not provide any input in the management of the business. On the other hand, with partnerships, there is shared responsibility in the management of the company. Everyone is keenly interested in making sure the business succeed and thus will provide their expertise in various areas, thus sharing the responsibility accordingly. This will reduce the workload and promote efficiency in the running of the business, which in turn will increase productivity.

4. Improved decision making of the business

One of the advantages of partnerships is that they help in the making of the sound decision. One person is not saddled with the decision making, as more people can brainstorm on a problem and come up with a suitable solution to the problem.

5. Saves times and resources

With many hands on deck, you can save time in decision making and carrying out functions in the business. Since responsibilities are shared, time will be saved as more will be done with less time with the use of fewer resources. This is why many partnerships perform better, and decisions are effected faster than in sole businesses.

6. Promotion and awareness about the business

Being in partnership with people of prestige or popularity will improve the brand if the business and create awareness. There are some situations where people have a partner with others of reputation to help promote the company among the public. A popular face will increase awareness as well as profit for the business. Thus business people can also consider the influence of the partners coming into the business.

7. Credibility to obtain a loan

One of the merits of partnerships is that it gives you credibility with top financial institutions and banks. Partnerships are more likely to obtain loans than sole proprietorship business because they portray a better structure that one-person business. Also, with the number of people running the company, it is expected that they are likely to repay these loans faster than sole ran business.

8. Continuity of the business

With partners involve in the business, there is bound to be continuity when one partner is not available. If a partner is sick, going on holiday or will be unavailable for one reason on the other, the running of the business continues, which brings confidence by the stakeholders.

Demerits of Partnership

Like everything that has advantages, it will also have its disadvantage, which is also the case with partnerships. The following are the demerits you will experience with partnerships:

1. Time-consuming in decision making

It takes a lot of time to decide with more partners involved in the business, for they all have to agree. There have to be situations where the partners will have to deliberate too long on a decision which will waste time in getting things done.

2. The potential for disagreement between partners

Energy and time may be wasted in resolving a disagreement between partners in businesses. With more partners, you will have different people with differing ideas and understanding and may not align with the same reasoning most times. Regular occurrence of these disagreements may become a pattern, especially if there is growing feud which may take time to resolve.

3. Sharing profit

The sharing of profit does not sit well with everyone, since partners have to share according to the agreement. Cases may arise where some of these partners have to work harder than some but may end up receiving the same or less share of the profit. And this may end up creating some form of hostility in the group.

4. Lack of leadership within ranks

Another disadvantage of equal partnerships is that the business will lack direction since no one is a leader. There are too many back and front movement as the equal partners deliberate among themselves. With a leader, they will know who to follow, which gives the company direction.

5. Lack of innovation

People may not be free to take a risk in partnerships, and this reduces their creativity. Some of the partners may not be willing to take risks and will call out the shot for any innovative ideas. Everyone will have to go with the majority decision regardless of its impact on the company.

6. The loss of control of your business

The invitation of others to become partners in your business may cost you the control of the company. Every decision will have to be pass through the partners, and they have to agree before it scales through. And this can be painful, especially for someone that knows the business, building it from scratch. The company may lose its identity as the partners may want to effect changes to suit those with higher votes.

7. Limitation on expression

With partnerships, you are limited to express your feelings and desire about the business. In the process, you become less innovative and lack initiative, especially if they decide to always go against one person in the group.

8. Taxation of partners

One of the disadvantages of partnership is that taxes are the same as sole business owners. Each of the partners gets taxed separately like they own the business individually and not as a group. One would have expected the opposite, but with taxes, there is no advantage in the partnership.

9. Liability

One of the disadvantages of general partnerships is that all involved will share in the risk of the business. However, this can be countered by going for the limited liability structure of partnership.

Conclusion

A partnership can be a potent form of association to help the growth of your business. We have discussed extensively on understanding the meaning of partnership and its forms, which will help in making the right decision about the suitable form of partnership for your business. Furthermore, we consider the features of partnership to understand how they are form, the legality and what is required to stay in partnership. Also, there are several advantages and disadvantages of getting into partnership as also discussed in this article. These merits and demerits will help you to understand the scope of partnership and how to prepare for what may occur in your partnership deals.

It is vital to understand the laws and regulation governing the partnerships in your region. The legality of the partnership is also essential to maintain the structure and provide a guideline for the people involved. Getting into a partnership have the potential of growing and improving your business, but ensure you get it right by following the proper guideline. It is best if business owners consult a business lawyer to determine the potential of the partnership after appropriate research of the people that the owner want to go into partnership. The set of people to partner in your business is vital as they will influence the success or failure of the company. The motives of the partnership should be clearly stated at the onset to avoid any form of eventuality.

Starting a Business

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