Business partnership agreement pros and cons

Sometimes, going it alone in business ownership isn’t ideal. With a business partnership agreement, you can share the responsibility with someone else, which makes it an excellent way to pool your experience, knowledge, and resources, giving you the best possible way to start a business.

What is a partnership business?

The definition of partnership business refers to a business partnership that makes multiple people owners. That means you share in both the good and the bad, including profit, losses, and any liabilities the business has. Each partner pays tax on their share of the profit. A business partnership agreement can be made of more than two people, and not all named partners need to have equal ownership rights over the business. Notably, partners do not have to be people; a limited company can also be considered a partner.

Why use a business partnership agreement?

A general business partnership agreement is similar to a sole trader business, but between multiple people. This means it can be very quick to get up and running, without the extra admin concerns that would come with a limited company or more complex business structures. It’s an ideal way to create a strong core team. For example, perhaps you want to start a business and have a strong financial background so you can create a solid financial plan for your start-up. However, you have no experience around customer-facing duties. So, you can partner up with someone who shares your vision and fills in those blanks in your skillset.

Partnership business examples

There is more than one type of business partnership agreement, and the best one will depend on your personal circumstances:

General partnerships

A general partnership is the most straightforward option, nominating partners who deal with the daily running of a company and who share in responsibilities for liabilities.

Limited partnerships

Limited partnerships are similar to general partnerships but with the addition of a limited partner who has less responsibility in the business. A limited partnership must have at least one general and one limited partner, and an individual cannot be both at once. These roles vary in several ways.

General partners are:

• Liable for business debt

• Able to control and manage the business

• Can make binding decisions

Limited partners must:

• Contribute money to the business when it is set up

• Can only be liable for debts up to the original contribution amount

• Cannot manage the business

• Cannot retract their contribution

Limited liability partnership

A limited liability partnership (also known as an LLP) is made of multiple members who share in the profits but are not liable for any debts the business cannot pay. A limited liability partnership needs at least 2 designated members. Considerations for each member’s role should include:

• Profit distribution

• Which members are needed to finalise business decisions

• Each member’s responsibilities

• How members can be added to, or leave, the partnership

Pros and cons of a business partnership agreement

There are many advantages to sharing the load with a business partnership agreement, but there are also some pitfalls you should be aware of.

Partnership business advantages

• Easier admin than with a limited company (no need for a Corporation Tax Return)

• Tax paid by each partner as self assessment

• Partners have more freedom and can leave at any time

• No need to register with Companies House (for general partnerships)

• Half the worry – business concerns are split between partners

• Allows for a stronger team by combining multiple skill sets for ownership

• Investors can support a business without being heavily involved (for a limited partnership)

Disadvantages of partnership business agreements

• No involvement with Companies House (as a general partnership) can make a business seem harder to gauge in terms of financial transparency

• Less secure – general partnerships must be dissolved if one partner leaves, even if the other opposes the decision

• General partners in a limited partnership will have greater responsibilities and increased admin

• Limited liability partnerships need to be registered at Companies House, requiring more financial paperwork annually

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