What is a Partnership?

A partnership is a type of business entity in which partners (owners) share with each other the profits or losses of the business undertaking in which all have invested. Partnerships are often favored over corporations for taxation purposes, as the partnership structure does not generally incur a tax on profits before it is distributed to the partners (i.e. there is no dividend tax levied). However, depending on the partnership structure and the jurisdiction in which it operates, owners of a partnership may be exposed to greater personal liability than they would as shareholders of a corporation.

Advantages of Partnership

Easy to set up More capital can be brought into the business. Partners bring new skills and ideas to a business Decision making can be much easier with more brains to think about a problem. Partners share responsibilities and duties of the business. Division of labor is possible as partners may have different skills. With more than one owner, the ability to raise funds - Debt vs Equity may be increased. The profits from the business flow directly through to the partners' personal tax returns.

Disadvantages of Partnership

There is unlimited liability: All the partners are responsible for the debts of the firm and if the business goes bankrupt, all the partners will have to clear the debts even if they have to sell of their personal belongings. Disagreement among the partners can lead to problems for the business. There is a limit to the capital invested. Because of the fact that maximum 20 members are allowed, the business may find it difficult to expand after a certain limit. There is no continuity of existence. Partnership is dissolved if one of the partners die or resigns or becomes bankrupt.