Today I want to talk about the types of startups and the benefits/challenges of a partnership Vs a limited company. To be honest, I don’t see a huge difference because one can argue that even a Ltd company can be a partnership depending on the types of shares. It can extend to one to many partners or can even work as a sole trader. The benefit however being, it can eliminate personal liability since it can separate the individual from the business. However, partnership and sole ownership are the oldest structures of business and the most common ones too.
My advice for any new entrepreneur would be to start with a ltd company because it is what your investors will expect from you. Not only will it help your conversations, but aid the investment discussions, and share or equity-based funding easier. And also, why would you want to hold on to personal liability when there’s an option to create a buffer for yourself? With that in mind, let’s now talk about 10 salient features that categorise the difference between a partnership and a Ltd company.
| Feature | Description |
|---|---|
| Shared Ownership | More than 1 owner for the business |
| Shared Profits & Losses | Profits and losses are shared based on their ownership percentage |
| Joint Decision-making | All partners have an equal say in the business irrespective of their investment |
| Unlimited Liability | You bear personal liability for business decisions and debts etc |
| Flexible Structure | Easy and cheap to set up, can work on informal agreements |
| Limited Life | Doesn’t usually last beyond the partners unless they make specific arrangments for this |
| Shared Responsibilities | Similar to a Ltd company where workload is distributed based on capabilities |
| Taxation | Company doesn’t pay tax, but individuals or partners need to |
5 Salient Features of a Partnership
The main components of a partnership are highlighted below in this table.
Shared Ownership
A partnership by definition shares ownership of the business. This ownership can be split based on operations, investment, costs, etc. Technically, all partners will be liable for the taxation and legal responsibilities of this type of ownership. In a limited company, our liability is limited to the share value. However, in a partnership, there’s an increased responsibility for the entrepreneur. Most investors don’t like this type of model because it interferes with future growth and payout routes which are easier to achieve under the limited company format.
Shared Profits and Losses
All partners share the outcomes of the business. If it is a success, this is shared across all investors and partners depending on their holding. The same holds good for losses and debts as well.
Joint Decision-making
Each partner will have an equal say in the business. In an Ltd company, you can limit the partner’s say based on their shareholding. However, in a partnership, all partners can weigh in equally for any decision in the business. Unless you have high levels of trust with your partner, I would not select this as the right structure for the company. Investors under equity funding don’t like this model because it limits their impact on the business based on their shareholding.
Unlimited Liability
This is the riskiest part of the partnership -you are personally responsible for the debts of the company. If the company owes money to a business or an individual, then the partners will bear personal liability. In a Ltd company, you are protected since this right extends only to the assets of a company and not your funds.
Taxation
Since partnerships are personal liabilities and assets – the business doesn’t pay taxes. Instead, taxes are paid as individuals. This has to be reported separately under self-assessment.
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