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When establishing a business, one of the first things you will need to consider is which is the most suitable business structure. Each structure has advantages and disadvantages, with the most appropriate structure depending on your business’ unique circumstances. For example, one type of business structure is a partnership. To help, this article will take you through some considerations to help you determine if a partnership is suitable for your business.

Types of Partnerships

A key thing to note is that there are three different types of partnerships:

  • general partnerships;
  • limited partnerships;
  • and limited liability partnerships.

The table below provides a brief explanation of the different partnership types.

Type of partnership

Explanation

General partnership

This type of partnership involves two or more individuals carrying on a business, sharing equal rights and responsibilities for the business. In a general partnership, each partner has unlimited personal liability for the other partners’ actions, debts, and obligations.

Limited partnership 

In a limited partnership, one general partner assumes full personal liability of the partnership. Meanwhile, other partners restrict their personal liability to the amount of their share or investment in the business. In a limited partnership, the limited partners have no decision-making authority in the business.

Limited liability partnership

This type of partnership allows partners to limit their individual responsibility for the acts of the other partners and the debts of the partnership. This type of partnership is most prevalent amongst large businesses needing substantial asset protection.

Knowing the different partnerships available to you might help you determine if a partnership is suitable for you.

Signs a Partnership is Suitable For Your Business

While the most suitable business structure for you will depend on your business’ unique needs, some indicators will help you determine if a partnership is right for you. Indeed, there are some key questions you should ask yourself.

1. How Much Control Do I Want?

A partnership will be a suitable structure for you if you want to share the control and management of your business with your potential partners. Importantly, if you are happy sharing control, a partnership might be suitable for you. However, if you think you will have regular disagreements with your potential partners, you may want to reconsider. Having equal partnership making decisions can lead to disputes, making it difficult to manage and operate the business.

2. Do I Trust My Potential Partners?

Before deciding if a partnership is suitable for your business, you should consider whether you trust your potential partners. To successfully operate a partnership, you should ensure that you have similar goals, values and will commit the same amount of time to the partnership as your potential partners. Further, you should consider if you trust your partners on a financial level. For example, if you do not believe that your potential partners will pay their portion of the partnership debt, you should be cautious about entering a partnership. 

3. Do I Want a Simple or Complex Business Structure? 

One of the key features of a partnership is that it is simple and relatively inexpensive to set up and manage. This makes a partnership an attractive option for many business owners. However, if you consider that your business will be bringing in a significant profit, a different structure, such as a company, might be more suitable. 

Notably, each partner pays tax on their share of the partnership profit at their individual tax rate in a partnership. In comparison, companies have access to different taxation structures, which will vary from company to company. The different taxation rates available can make managing a company’s financials tedious and complex. Hence, this is why most companies opt to have an accountant manage their finances.

4. What Value Will My Potential Partners Bring?

Ultimately, a partnership brings together two or more parties to cooperate to advance their mutual interests. This means that you should enter a partnership with those who will bring resources or expertise in the area of your business. However, if you find that your potential partner does not have much to contribute to the partnership, be it a lack of resources or industry expertise, you might want to reconsider if a partnership is suitable for you.

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Key Takeaways

There are a few indicators that will help you determine the most suitable business structure for you. When deciding if a partnership is suitable for your business, you should ask yourself some key questions, including:

  • How much control do I want?
  • Do I trust my potential partners?
  • Do I want a simple or complex business structure?
  • What value will my potential partners bring?

If you need assistance deciding if a partnership is suitable for your business, LegalVision’s experienced business lawyers can help. You can contact them on 1300 544 755 or by filling out the form on this page.

Frequently Asked Questions

What is a partnership?

A partnership is a business structure where two or more parties carry on a business together with the view to profit. In a partnership, partners distribute income and losses between themselves and share in the control and management of the business. Partnerships are relatively simple to set up and have minimal reporting requirements compared to other business structures.

Is a partnership suitable for my business?

There is no one size fits all business structure. Indeed, there are several things you should consider when deciding if a partnership is suitable for your business. Firstly, you should ask yourself how much control you want in a business. Secondly, consider whether you trust your potential partners. Next, ask how simple you would like your business structure to be. Finally, evaluate the value that your potential partners bring.

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