Partnership

A partnership is a business owned by two or more people who share its profits, losses and responsibility according to an agreed arrangement. Each owner is a partner and a legal owner of the business.

Liability and profit sharing

An ordinary partnership has unlimited liability. Responsibility for debts is shared between the partners, but sharing it does not protect anyone: if the business cannot pay, each partner's personal savings and belongings are still at risk. (A limited liability partnership, or LLP, is a separate form with its own rules.)

Partners agree a profit-sharing arrangement before they start trading, so nobody argues later about who gets what. Profit is split according to the agreed share, which is not necessarily equal. For example, Ravi and Sam set up a gardening business. Ravi invests £4,000 and works five days a week; Sam invests £1,000 and works three days, so they agree a 70:30 split. On £10,000 profit, Ravi takes £7,000 and Sam takes £3,000.

Advantages of a partnership

• Partners bring different ideas, skills and experience, covering gaps in knowledge.
• More people can invest capital, so more money is available than with one owner.
• Workload and responsibilities are shared, and the business keeps running if one partner is ill or away.
• Decisions are discussed with someone else, so choices are usually better thought through.
• Financial information stays private, and set-up is cheap and easy.

Disadvantages of a partnership

• Unlimited liability puts personal assets at risk.
• Profits are shared, so each owner keeps less than a sole trader would.
• Partners may disagree over key decisions, so decision-making can be slower.
• Each owner has less control than a sole trader, and conflict can build over workload or the direction of the business.

Because decision-making is shared, you and your partners should agree who decides what: one partner might handle suppliers and pricing while the other handles staff and marketing, and you should also agree what happens when you disagree.