A partnership is a business where there are two or more owners of the enterprise.
Most partnerships are between two and twenty partners though there are examples
like John Lewis and some of the major world accountancy firms where there are
hundreds of partners.
A partner is normally set up using a Deed of Partnership which sets out the rules for
running the partnership so that disputes can be avoided.
The Deed of Partnership contains:-
Amount of capital each partner should provide (i.e. starting cash).
How profits or losses should be divided.
How many votes each partner has (usually based on proportion of capital provided).
Rules on how to take on new partners.
How the partnership is brought to an end, or how a partner leaves.
The advantages of a sole trader becoming a partnership are:
Spreads the risk across more people, so if the business gets into difficulty then there
are more people to share the burden of debt
Partner may bring money and resources to the business (e.g. better premises to work
Partner may bring other skills and ideas to the business, complementing the work
already done by the original partner
Increased credibility with potential customers and suppliers – who may see dealing with
the business as less risky than trading with just a sole trader
The disadvantages of becoming a partnership are:
Have to share the profits.
Less control of the business for the individual.
Disputes over workload.
Problems if partners disagree over of direction of business.
Advantages of being a partnership rather than a limited company
The next step for a partnership is to move towards becoming a private limited
company. However some partnerships do not want to move to this stage. The
advantages of remaining a partnership rather than becoming a private limited company
Costs money to set up limited company (may need to employ a solicitor to set up the
Company accounts are filed so the public can view them (and competitors).
May need to spend money on an auditor to check the accounts before they are filed.
When a partnership finishes then, depending on how the Deed of Partnership is set up,
each partner has an agreed slice of the business.