Business Ownership - Sole Proprietorship And Partnership
2.) Partnership
A partnership is very similar to a sole proprietorship, instead of a single owner there are two or more owners. There is no legal distinction between the partners and the business, they are a single legal entity. It’s almost impossible to establish rules and procedures after a dispute has already broken out make sure your contract at least covers the following points:
- Ownership and profit sharing
- Admittance of new partners and buying out of old partners
- Dispute mechanisms
- Rules for breaking up the partnership
Advantages and disadvantages of this type of ownership:
Advantages
- As with a sole proprietorship a partnership is easy and affordable to setup and run, however a well written contract is essential
- Partners can raise more start-up capital than a sole proprietor; this means more costly and possibly more lucrative business ideas can be attempted
- Partners also share knowledge, expertise and management responsibility
- It’s possible to attract motivated employees with the incentive to become a partner
- No distinction between personal and business income means far tax complications
Disadvantages
- No legal distinction between the owners and the business means unlimited liability for the owners, there is also unlimited liability between owners
- When you’re on your own there are no arguments to be had, working with partners mean disagreements can occur
- Breaking up a partnership can be very messy unless your contract is crystal clear on every possible eventuality
There are three different forms of partnership agreements
1.) General Partnership
Partners in a general partnership share profits and responsibility equally or according to an internal agreement.
2.) Limited Partnership
A limited partner has both general partners, defined above and limited partners. A limited partner has limited liability with regards to their management input and investment. General partners run and manage the company on a day to day basis. The purpose of the limited partnership agreement is to encourage silent partners who act as investors in the company.
3.) Joint Venture
This form of ownership is the same as a general partnership but only valid for a limited time period. Joint ventures are usually used for single projects between entrepreneurs. Once two entrepreneurs repeatedly form joint ventures they will have to form a formal general partnership.
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