Business partnerships can either be a good or a bad choice for your business. Whether it has a positive or negative outcome depends on a few factors. However, if you understand the pros and cons of business partnerships, you should be able to discern whether or not it is for you.
A business partnership is a legal agreement between two or more individuals who have collectively decided to engage in a business transaction. A document called a partnership contract is a legally binding document that shows the commitment of the partners to work together. It acts as a strategic map that outlines the direction, duty, roles, and even privileges of every person involved.
Having such a document that states what the agreed-upon terms are is a good idea because it helps avoid misunderstandings and confusion about the expectations from all parties.
Why Consider Partnerships?
Two types of partnerships exist. These are ordinary and extraordinary partnerships. In the first instance, the partners are known to the public and usually contribute to the partnership through labour or other means. With extraordinary partnerships, the other parties are anonymous and only the partners know who they are doing business with.
The type of partnership you choose to enter into will depend on your goals for entering such a venture.
Benefits of Partnerships
Here are some of the benefits of entering a partnership in South Africa:
Set-up is simple
In South Africa, there are essentially no legal formalities to set up a partnership which makes it relatively cheap and quick to establish.
Flexibility
In terms of management, partnerships are regulated far less in comparison to other types of companies.
Profits, Responsibility and Decision Making
Partners share profits according to the ratio agreed upon in the partnership agreement. Furthermore, skills and responsibilities are shared across all parties, and if leveraged correctly, individuals can collaborate with skills that complement each other.
Taxation
Partnerships are taxed differently. In fact, it can be an advantage as the partners pay tax individually only. The benefit is that a partnership business does not pay tax as it is not a separate legal entity.
Audits
There are limited external regulations about audits, meaning that currently there are no statutory requirements for auditing partnerships.
Other benefits also include the fact that individuals can shoulder losses together and celebrate victories. This element, although not directly related to business dealings shouldn’t be underestimated.
Disadvantages of Business partnerships
Some drawbacks also exist when it comes to partnerships. These are as follows:
Conflict
In a partnership, it is very easy for disagreements to arise. To mitigate this, information should be included in the partnership agreement that indicates how conflict and disagreements are addressed.
Similarly, before any business decisions are made, all the partners need to agree on the way forward.
Liability
Partnerships have a major drawback when it comes to liability because partners are subject to unlimited liability. This means that every party shares the liability and financial risks of the business. Should a partnership’s estate become bankrupt, then the individuals are responsible for settling any debt lest they also be sequestrated.
Taxation
The way partnerships are taxed can also be a disadvantage because partners who are taxed personally need to declare earnings accurately.
Profit-sharing
Partners share the profits equally. Where the disadvantage comes in is when partners don’t contribute equally to the venture yet profit equally, this can create friction.
Life Span
As long as the partners remain in the business, the partnership is in existence. Should any changes occur, the entire partnership needs to be dissolved and a new partnership should be formed to accommodate the changes. The administrative tasks connected to this can become incredibly cumbersome.
Weighing to advantages and disadvantages of considering a business partnership is vital. Without considering both sides of the argument, you might find yourself in a situation where you are not satisfied. Remember, just because a partnership works for some people does not mean it will work for others. Take the time to talk it over with your potential partners and choose the option that benefits your business the most, not just the partners.
