What is a business partnership? The ultimate guide
Updated 7 June 2023
There are different types of businesses, including sole proprietorship, corporations and partnerships. A business owner may choose a partnership structure for their business, depending on several factors that affect their needs and how they do business. It's important an entrepreneur learns the intricacies of a partnership if they are looking to start their own business. In this article, we discuss what a partnership is and answer frequently asked questions about partnerships.
What is a business partnership?
If you're new to the world of business, you may be wondering what a business partnership is. A business partnership is a kind of business structure with multiple parties who unite to operate and manage an entity for a profit. It is ideal for people in the same line of work and who share the same vision. The two or more partners make formal arrangements to combine their resources, experience, skills and knowledge in running the business.
What is a partner in business?
There are different types of partners in the business sector. Different partnership positions have different roles and characteristics. Some business partners include:
Active partner and dormant partner
An active partner contributes capital and takes an active role in the management of the business. They are liable for the activities of the firm. A dormant partner contributes a share capital and takes no active interest in the operations of the partnership. They are responsible for the actions of the business and share the profit and losses of the firm.
Nominal partner and limited partner
A limited partner has a financial stake in the business but no management responsibility. They are only liable up to the value of their share capital. A nominal partner is a person who contributes no funds, does not get a share of the profits and is not involved in the running of the business. The firm only takes advantage of the name and reputation. Note that a nominal partner may be liable to the third party for the actions of the business.
Other partner types
Partner by estoppel is when a person is not technically a partner but represents the firm either through conduct, written or spoken words. This leads outsiders to believe and act as though they are a partner. Other types include a partner in profit, silent and secret partners.
What are the common forms of a business partnership?
There are three main categories of partnerships. They are:
It is a basic form of partnership where all parties share legal and financial liability equally. The partners are personally responsible for the business debt and legal obligation. The partners are active in the business operation and can bind the firm to contracts and loans.
Limited liability partnership
All partners in this category are limited liability business partners. This means the parties are not exempt from the firm's debts, but are exempt from liability of other partners' actions. Creditors cannot access the partners' personal assets or their income if the partnership fails.
It has at least one general partner with personal liability for the partnership's debt. The partner takes full responsibility for the business. It also has passive investors with limited liability up to the amount that they have invested. The investors are there for financial returns and are not active in the day-to-day management of the enterprise. A partnership agreement requires registration at the Registrar of Companies.
How does a business partnership work?
How partners run an entity varies from one partnership to another. It may be dependent on the reason and the goals of a partnership. Some of the reasons for forming a partnership include looking for more resources, expanding to new markets and attracting new customers. A partnership may have parties actively working for the business and others with limited participation. The partnership agreement clarifies the parties' rights and obligations and the relationship between the parties. A partnership is not a separate entity from the partners, unlike a corporation.
Related: 4 types of businesses to start
What details are in a partnership agreement?
The agreement is a fundamental part of a partnership as it highlights how you run your enterprise. Some of the details it has includes:
the names and contact information of all the partners
the percentage of ownership and distribution of profits
the duration of the partnership and grounds for expelling a partner
the protocols for withdrawal of the partnership and how to resolve dispute
the rights of partners and procedure of adding new partners
the names of those who manage the business and the contribution of limited partners
What are the factors to consider when choosing a partner?
The success of a partnership depends on the decisions you make when choosing a partner. This decision has long-term effects, so is made wisely. Aspects to consider while picking a partner include vision, values and goals. Seek a partner who has the same vision as you and one who believes in your abilities. Ensure you share the same values and goals to avoid conflicts and dissension. Form a partnership with someone who recognises the worth of new ideas and prioritises them into a strategy for success. Such a partner commits to achieving the business goals and seeing your business succeed.
Related: How to develop SMART goals
Knowledge and experience of your industry
Choose a partner who fully understands the dynamics of your business industry. Ensure that they have experience in dealing with the many challenges that a business can face. Depending on your reason for partnering, pick a partner who helps you find solutions to the difficulties you are facing.
Finances are the lifeline of any business. Consider a partner with strong financial resources to bring financial stability to your firm. A partner with a financial stake in the partnership invests their time in helping you grow the business.
Related: How to set up a business partnership: a step-by-step guide
How do you start a business partnership?
As you prepare to start a partnership, make decisions about the partners in terms of partner types you want, the contributions and partner shares. The following are the steps of starting a partnership:
choose a partnership name
create a partnership agreement
register your partnership
acquire permits and licenses depending on the nature of the business
Related: What are partnership benefits? (With pros and cons)
What are the advantages of a partnership?
The partnership model is a common form to run a business. Partnerships can be formed in any sector or industry, which is one of the reasons it is such a popular model. Some of the other advantages of the model include:
Easy to start with few legal obligations
You do not require lots of paperwork when starting in comparison with a corporation. The creation and signing of the partnership agreement are more simple than signing paperwork for other business models. As a partner, you file your tax return and no business tax forms. You also maintain fewer records and in case you did not create a partnership agreement, dissolution is easier with no restrictions.
Better decision-making and sharing the burden
When you have two or more people making decisions together, different perspectives can be beneficial. Starting a business on your own can be expensive; partners ease your financial burden by splitting the cost. Accessing credit can be easier with two or more partners.
Access to skill, experience, knowledge and networks
Every partner brings their skills, contacts and experience to the business, giving it a higher chance of success. With more networks comes an increase in the customer base. Partners get to share tasks between them that they have a speciality in or one that they are conversant with. The business then saves money, time and resources as partners can help a business to run more efficiently.
What are the disadvantages of a partnership?
There are also limitations to partnerships. A negative or unsuccessful partnership can be detrimental to a business. A partnership has several disadvantages:
Potential differences and conflicts
Joining a partnership makes you lose your autonomy and for the benefit of the partnership, every member compromises. Differences in the business may arise if a partner's expectations change creating disagreements. Such conflicts destroy the relationship between partners and can harm your business. A partnership agreement may help in following the procedures of conflict management.
All profits are shared amongst the partners equally. It can be unfair for someone who puts more effort and spends more time in the partnership and still gets the same share as a lesser active member. Finding this balance is key to the success of the partnership.
The partnership is not a separate legal entity and partners are liable for debts and losses of the firm. It means that for some forms of partnerships, you are at risk of losing your personal assets. As partners, you are jointly and severally liable for the actions of one partner that can affect all the partners.
Slow decision making
Business partners consult and discuss important matters, which can slow decision-making processes. Partners spend a lot of time building consensus, which may mean a lost opportunity for the business. It is important that decisions are made in a timely manner.
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