What is a business partnership
A business partnership is a formal agreement between two or more people or entities who come together to establish and run a business. This legal arrangement allows partners to share the responsibilities, profits, and decision-making powers of the business. Moreover, partnerships can involve individuals, companies, or a combination of both. This creates a collaborative effort towards common goals.
How is a business partnership established
Establishing a business partnership often starts with a simple conversation between colleagues and friends. They come together as partners to discuss their ideas and intentions for the business and agree to work together on a new venture or share an existing one. Once all the partners reach a consensus, they need to put everything in writing, formalising it as a business partnership agreement.
This written business partnership agreement should clearly outline the following:
- The type of partnership.
- Each partner’s roles and responsibilities.
- How profits and losses will be shared.
- Having a formal document is key to preventing any mishaps later on. All parties involved must sign this document to make it official.
Types of business partnerships
There are three distinct types of business partnerships each with its own unique characteristics. These are as follows:
- General partnership: In a general partnership, all partners are involved in running the business and share the liability for its debts. This means that if the business faces financial difficulties, all partners are responsible for covering the losses.
- Limited partnership: A limited partnership consists of at least one general partner who manages the business and takes on full liability along with one or more limited partners. Limited partners usually do not take part in daily operations and have limited liability which means that their financial risk is limited to their investment in the business.
- Limited liability partnership: In a limited liability partnership or LLP, all partners are protected from personal liability for the business’s debts. This structure is commonly used by professionals, such as lawyers and doctors, as it helps safeguard their personal assets.
Difference between a business partner and a shareholder
While both business partners and shareholders have part ownership in a business, their roles and responsibilities differ significantly. A business partner has a stake in the business based on an agreement with the other partners and usually plays an active role in managing the business and helping make key decisions.
On the other hand, a shareholder owns shares in a publicly traded company. Their involvement is limited to their shareholding, and while they may have voting rights on important matters, they do not participate in active daily management. Shareholders are generally not personally liable for the company's debts, which provide them with a cushion in case the business encounters any legal or financial troubles.
Advantages of forming a business partnership
Establishing a business partnership comes with several advantages such as follows:
- Shared resources: Partners can combine their finances, expertise, and skills which lead to more comprehensive and robust business operations.
- Diverse skills and ideas: Each partner brings their unique strengths and perspectives that foster creativity and innovation in decision-making.
- Flexibility: Partnerships allow for a flexible management structure that can adapt as and when the business expands.
- Easier access to funding: By pooling resources, partners may find it easier to secure loans or investments, which in turn, enhance the potential for growth.
Disadvantages of business partnerships
Some disadvantages of a business partnership include the following:
- Shared liability: In most partnerships, all partners share some amount of the liability, which means that personal assets could be at risk if the business fails.
- Potential for conflict: Differences in opinion and management styles can often lead to disputes, which may hinder the business's growth.
- Limited control for some partners: In a limited partnership, those who invest without managing the business may feel disconnected from important decisions.
- Profit sharing: Unlike sole proprietorships, profits in a partnership must be divided among all partners which may reduce individual earnings.
Conclusion
A business partnership is a collaborative arrangement that allows individuals and entities to work together towards common goals in the form of a business. Knowing how to establish a partnership, the types available, and the differences between partners and shareholders is integral for anyone considering this option. So if you are exploring financing options to support your business, consider looking into a business loan to help facilitate the growth of your business.
