Advantages and Disadvantages of a Partnership

Partnerships have several advantages, including:

  • Ease of formation: Partnerships are relatively easy and inexpensive to establish, and they are relatively free from government regulations and restrictions.

  • Capital, skills, and experience: Partnerships allow for the combination of more capital, skills, and experience than sole proprietorships.

  • Lower income taxes: The combined income taxes paid by individual partners may be lower than the income taxes paid by a corporation.

  • Ease of decision making: Decisions can be made quickly on substantial matters affecting the firm, as formal meetings with a board of directors are not typically required.

However, partnerships also have limitations. These include:

  • Limited life: Partnerships have a limited lifespan and can be dissolved by any change in the membership of the partners.

  • Unlimited liability: Partners are personally and individually liable for all partnership liabilities.

  • Mutual agency: One partner can bind the partnership to contracts through their actions on behalf of the partnership.

  • Difficulty in raising large amounts of capital: It may be more difficult for a partnership to raise large amounts of capital compared to a corporation.

When deciding between a limited liability partnership (LLP) and a corporation, factors to consider include the income status of the enterprise and its owners, as well as the opportunity for obtaining large amounts of capital. LLPs do not pay income tax but are required to file an annual information return, while corporations are separate legal entities subject to corporate income tax. However, corporations may have better opportunities for raising larger amounts of capital.


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