The partnership business advantages and disadvantages inform why one should enter or avoid a partnership. Compared to other forms of business organization, these pros and cons might support a partnership as a better business. Conversely, such a comparison might make a partnership less attractive.
In such a case, you can weigh other viable options to commit your capital investment. Perhaps, you could also leave another form of business and get into a partnership because its advantages and disadvantages are more favorable.
Partnership Business Advantages
1. Ease of establishment
As one of the other advantages of partnership, it is easy to start since only a few legal formalities are required. Partners are not legally required to have a formal agreement amongst themselves. Partners can get a lawyer who simplifies the entire process of forming a partnership agreement.
2. High skills levels
Partners with high skill levels can be incorporated into their partnership to provide high-quality services. Partners distinguish themselves with respect to their area of expertise. Each partner is allocated a job role in which they are most experienced. These experienced partners form a professional team focused to succeed.
3. Limited regulation
Partnerships face few interferences from the legal bodies and the state on their operations. Unlike a public limited company, less strict legal regulation is among the significant advantages of partnership. Since partnerships are not allowed to sell shares hence not affected by strict regulations on how the collected funds from members of the public.
4. Ease of change in a legal structure
Partnerships can easily be changed into private limited companies or even LLPs. It involves few hustles to get the required initial capital to form a company. As an ongoing concern, a partnership goes through fewer steps unlike starting a company from scratch.
5. Availability of more capital
Partnerships are open to a wide source of capital, making them easy to start with very few legal formalities and capital to start and run. Even though a partnership firm cannot raise capital by selling shares, it easy to raise funds than a sole proprietorship.
6. Gaining industry experience
Being conversant with industry is among advantages of partnership. Partnership facilitates establishment of enabling environment for peer-to-peer learning. A partner can learn a skill from the other partner regarding industry in which their partnership is operating. This peer-to-peer learning equips partners with actionable knowledge. Partners also develop the right skills to implement their assigned roles.
7. Variety of options
There are different types of partnerships for partners to choose. Partners can exercise their choice and settle on their preferred type of partnership to register and operate. The open choice ensures a partnership established will suit the business and investment interests of partners.
8. Leaning into expertise of other partners
Partnerships bring experts from different fields. The skill that one partner has a deficiency in is probably an area of expertise for another partner. Partners can increase success rates if their partners through strategic allocation of roles and duties. Success in one business activity, for instance, marketing, and accounting among others, is high provided one of the partners is skilled in such area.
9. Nurturing team building skills
The success of a partnership firm is dependent on the effectiveness of all partners. Partners learn team-building skills like communication, conflict management, critical thinking, and active listening, among others.
10. Builds prosocial behaviors
Partners learn to do what is right and beneficial to other partners. This development of positive intent to do right for others to benefit is called prosocial behavior. Partners perceive nurturing more prosocial behaviors as an advantage of partnership.
Partnership Business Disadvantages
1. Unlimited liability
In a general partnership, partners’ assets may be used to settle debts and other liabilities that may befall the partnership firm.
2. Conflict of interest
A partner may put their own needs before those of the partnership. This among other disadvantages of partnership may cause some conflicts, especially when it results in a loss since their partners are liable for a mistake made by one partner.
3. Vulnerable to dissolution
Partnerships can easily be dissolved when a member dies, becomes insolvent, and the time for operations elapses. This can make them very temporary.
4. Limited transfer of ownership
Partnerships do not have a free transfer of ownership policy as enjoyed by other business structures. This limits the transferability of shares.
5. Disputes due to little regulation
Legal disputes may arise since partnerships can be formed through a gentleman’s agreement. This among other disadvantages of partnership limits their legal life.
6. Inability to separate business and personal interests
Some people get into partnerships with their close friends and family members. They unknowingly assume because they are causal friends of relatives, they can run a successful partnership. They fail to put more emphasis on their business interest and are held back by their friendships or family interest outside business.
7. Possible dishonesty from some partners
Some partners are likely to assume that their colleagues will do the hard work on their behalf. They tend to relax and joyride on the success of hardworking partners. It results in the exploitation of partners who work hard and are committed to seeing their partnership firm grow.
8. Prone to unwanted dissolution in case of voluntary partner exit
If a partner voluntarily exists in a partnership, they force the partnership firm to dissolve. Partners resort to share assets among themselves and pay their creditors. Those with long-term plans attached to such partnership business are left with frustrations.
9. Limited to raise funds
Partnerships are not allowed to sell shares to members of the public. They cannot raise capital from investors through the issuance of shares. Furthermore, partnership firms struggle to raise funds through loan facilities given by financial institutions. Partners are also limited to the amount they can contribute from their income streams.
10. Limited life
Partnerships do not live as long as a public limited company can. Partnerships can be dissolved in many circumstances, including the voluntary exit of a partner, as discussed above.